Getty Realty Corp (GTY) 2011 Q3 法說會逐字稿

Good day, and welcome to today's Getty Realty third quarter 2011 earnings conference call. Today's call is being recorded.

Now for opening remarks and introductions, I'd like to turn the call over to Mr. Josh Dicker, Vice President and General Counsel. Please go ahead, sir.

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 and other words with forward-looking connotations. Examples of such forward-looking statements would include management's 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 the year ended December 31, 2010, our quarterly reports on Form 10-Q for the quarters ended June 30, 2011, and March 31, 2011, 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 provide some comments on our quarter and recent developments with Getty Petroleum Marketing, our largest tenant.

Thank you, Josh, and good morning, everybody. Thank you for joining us on the call today. Prior to starting my formal statement, I want to recognize the other officers of the Company who are on the call with Josh Dicker and me today. We have Mr. Leo Liebowitz, our Co-Founder and Chairman; our Chief Financial Officer, Tom Stirnweis; and our Executive Vice President, Kevin Shea.

Last night's press release reported results for the third quarter of 2011, it is available on our website and the SEC's website. I think it's on Yahoo! and all of the other standard suspects.

Now I want to start today by noting that while it may seem an after thought, I want to get on the record that we -- in our view, we had a pretty good quarter. If you look past the non-cash charges required by GAAP, all of our performance metrics increased by more than 25% over the prior-year quarter. This growth is a direct result of the accretive acquisitions we closed earlier in the year. I think it is important to keep this in mind, for future quarters, how quickly we can achieve growth once we're in a position to commence aggressively making investments again.

Of course, the big news for the quarter is related to GPMI and all the development around them. There are several active items currently being litigated. So I hope you all understand that I'm not going to comment much beyond what we have already disclosed in our earnings release, our filings with the SEC in these prepared remarks. However, I can say that we are running our business in order to achieve long-term shareholder value for our Company and that we intend to pursue our activities with GPMI from that long-term perspective.

One result of the GPMI activity is that we've decided to increase our reserve against the deferred rent receivable attributable to the Master Lease. This is essentially a GAAP driven exercise, founded on revised determinations we have made regarding the probability of collecting the fixed rent when due from GPMI under the Master Lease.

While we had previously concluded that it was probable, we would not collect all of the fixed rent due from GPMI during the remaining term of the lease, based upon our more up-to-date evaluations, we have concluded that we should increase the size of that reserve.

As a result this quarter, we took an additional $11 million non-cash charge to reflect an increase in our straight-line rent reserve. This charge is an addition to the amount we previously recorded as our reserve against the deferred rent receivable.

With due respect to GAAP and the accounting provision, the concept driving all this don't necessarily follow common sense.

Since the start of the Master Lease, GAAP has forced us to accrue rent receipts greater than the cash revenues we received. Now, we are reversing that non-cash entry with another non-cash entry. This is one of the main reasons why we have urged investors to consider AFFO as a better measure of our performance. We accept that before this is over, we may see some reduction in revenue from the GPMI portfolio. But that is simply not directly related to this $11 million charge.

So with all that in mind, the following highlights of our quarterly results relative to the third quarter of 2010, which were reported in our press release, but I'd like to underscore some of them now.

Revenues increased by $6.1 million to $28.1 million, a 28% increase. Adjusted funds from operations, AFFO, increased by 28% to $19.7 million, or $0.59 per share. FFO was $7.9 million, or $0.24 per share, which -- because FFO reflects the non-cash charge. And net earnings also reflecting the non-cash charge came in at $5.4 million, or $0.16 per share.

As I mentioned before, the main reason for our improved performance before non-cash charges was the accretive effect of our investment program.

At a more granular level, rental revenues and proceeds from sales continued to meet expectations. Proceeds from sales remained muted this quarter, but we expect these proceeds to increase in future quarters, as we close properties currently listed for sale and in our pipeline moving towards sale.

The three other main elements of our operating expenses; environmental, G&A and interest costs, also remained within our expectations.

Net environmental expenses were $1.7 million this quarter and increased from the $1 million the prior quarter, resulting mainly from increased provisions for litigation loss reserves and really unrelated to GPMI.

G&A costs also increased compared to last quarter. This increase is part of a longer-term trend, which is also not related directly to GPMI. We anticipate continued modest increases in G&A costs in the coming quarters, reflecting our issues with GPMI and the other activities required to manage our business.

Interest costs were flat for the quarter. But it should be noted that we had benefited enormously from credit pricing established before the 2008 credit crisis and that this is coming to an end.

Therefore, we anticipate our interest costs will increase in coming quarters, resulting more from an increase in our LIBOR spread to market-based pricing than any other factors.

As I mentioned earlier, the big news is GPMI, and as I have alluded to before, we are currently in a period of multiple related litigation issues. We don't think it's going to be constructive to comment much more than that about those, but I'm sure people are going to ask questions and we'll try to answer the things that we can.

So with that in mind, operator, do you want to explain the procedure for question to callers.

Thank you, sir. (Operator Instructions) Anthony Paolone, JPMorgan.

All right. Thank you and good morning. So I just want to understand, the deferred rent write-down that you took, is that -- does that cover all of the straight-line accrual related to marketing, or is there any left there?

There is some left. It doesn't cover it all. I think we took two-thirds of what was left and I think there's about -- what is it Tom?

$8.9 million.

$8.9 million left.

Okay. And so what -- so like for instances in the fourth quarter just going forward here, what will you do in terms of revenue recognition on the marketing side? Is it cash based or because you left some of the accrual out there you'll start to use some sort of GAAP revenue?

That is a really good question. At this point, based on what we know, we would accrue that rental income, because it's GAAP and its accrual, and it's not a question of whether we have any choice. We'd have to make a determination that it was un-selectable, and at this point, we don't think that's true. Remember, it's on deposit with the court and we think that -- we stated that we think that GPMI has no basis for their lawsuit.

Okay. And so -- and then just to understand what's happening there. The $4 million, I guess, for October, you have that, but the $900,000 is what's held with the court? Does that --

That's correct.

And then how about -- does the court stipulate what happens for instance for November, December, or is it the same split, or how does that work?

No. This whole fight was over October. Stay tuned.

Okay. So we actually don't know what will happen in November, I guess, at this point?

That's correct.

Can you talk a little about specifically what marketing is claiming as it relates to the environmental items?

Essentially, they've made a broad allegation that we have not complied with our environmental obligations under the Master Lease. To get much more into detail risks, all sorts of other things, but they've alleged that we are -- we haven't complied and we've countered that that's absolutely untrue.

Is there a specific dollar amount that they're claiming that they're trying to shave off of rent, or is this just a --

They have alleged October and November rent in one set of documents. In another set of documents, they didn't allege both of those months, but there hasn't been any specific identification to projects and dollars, if that makes any sense.

Okay. And then in terms of the case that's, I guess, still pending in terms of figuring out what their offset rights might be, I mean, what -- I know you said that's -- we just don't know how November and so forth is going to play out, but would they have to go back to the courts to not pay rent or I guess just legally not been aware, like just --.

It's sort of like the Milton Bradley rules, if you will, the rules of this game, Tony, are, if they don't pay rent, we can evict them. So what you saw in October was they didn't pay rent and they went into court to get the court to stop us from evicting them. And the court said, okay, you can't -- Mr. Landlords, you can't evict them, but Mr. Tenant, you got to pay 80% of the rent directly and post direct it with the court.

Okay. So (multiple speakers) they could just do that again in November and try and see if they get either the same outcome or perhaps even better or worse outcome?

Theoretically. But -- well, again, I -- they listen to this call too, so I don't want to.

Okay. Just another question on that. Just -- you mentioned in the press release, continue -- the continuation of, sort of, pruning that portfolio. I'm just wondering just how active that is, especially given the legal situation?

I think you can go to our website and you can see that we have a number of properties listed for sale. I would tell you that slow and steady progress is being made with respect to that portfolio in that list. It takes a while to sell individual properties at the street, and when I say it takes a while, it takes a while from the time something gets listed to the time something actually closes. So far I will tell you that the one bright part of our relationship with GPMI is that they appear to be continuing to show cooperation with respect to the disposition of properties. In fact, we closed the sale of one 10 days ago and we're proceeding on others even as we speak.

Okay. And then just my last line of question here, just relates to bigger picture. If we were to step back and better understand what the cash flows at the store level might be in the marketing portfolio, I mean what would be a fair EBITDAR coverage ratio, if you will, to set rents?

As you know, you've been asking that question for a year now. And I don't have a really good answer for you yet, but we're getting closer. That's the best I can do right now. I'm not trying to be evasive. I want -- I simply want to be truthful and in a position to back it up when we do give that answer.

Can you give us a sense as to what the EBITDAR levels were for the acquisitions that you made earlier in the year?

Greater than [1.5].

Okay. And do you feel that you have enough information right now on the marketing portfolio whether it's [gallonage] or in-store sales or whatever data you might need to feel comfortable with going down the path of a rent negotiation?

Mostly, yes.

Okay. Thank you.

Lindsay Schroll, Bank of America Merrill Lynch.

Hi, good morning.

Good morning.

Do you guys have any sense of quite what the timeline is in terms of the legislation? Are there any, sort of, dates or signpost that we should be aware of?

Lindsay, I think you mean litigation?

Yes. Sorry.

That's all right. The legal system doesn't move in normal time. It actually is probably the only thing in the world that moves slower than legislative time. So the final resolution of this could take a while than with respect to what happens in November, it's only at this point, 9.17 in the morning on the first day of November, so we don't know what's going to happen there.

Okay. As I'm turning to acquisitions, are you still able to focus on sort of acquisitions or is sort of this lawsuit, kind of, monopolizing most of your time and how do you sort of see that playing out over the next year?

I think we are certainly not looking at acquisitions with the same aggressive posture that we were looking at earlier in the year. However, I sort of alluded to it in the comment with Tony, we do have a number of properties listed for sale. We do expect to receive proceeds from over the next 18 months from -- significant proceeds from properties. And all of our modeling and intent shows a redeployment of those proceeds into acquisitions. So that if we were not to increase our net borrowings or otherwise address the capital markets at all, you [would] see us making acquisition over the next year.

Okay. Thanks. And then just finally, can you talk little bit about, I guess, the Board's decision regarding the dividend?

Sure. I think that's also a good question that probably I just should have addressed more in my remarks. But we evaluated the situation with GPMI and we knew that there was a rocky growth coming up in the future, and thought that it was prudent for us to reduce our payout in order to conserve cash to maximize our flexibility with respect to dealing with that.

We are happy that we made that move. We're gratified that the capital markets responded by trading the stock up on the day that we announced the dividend. And I think that it put us in a very strong financial posture in order to get the maximum long-term benefit. That's what I was talking about, managing their portfolio for the best long-term benefit of the shareholders.

Okay. Thank you.

Bob Gottesman, First Manhattan.

Yes, hi. I'd like to follow-up on the last question.

Sure.

And note that adjusted funds from operation was up 28% to $0.59, and also to connect that with a historical link of the dividend to AFFO. And so can you be more elaborative about dividend policy going forward? And this is a significant disparity in this quarter, and certainly it seems the quarter has turned out better than maybe you had thought of when you did cut the dividend. So the dividend is very, very important to us. And so cutting a dividend is very, very much -- it's very meaningful and hurtful. So can you talk about the connection between AFFO and dividends?

Sure. First, I want to observe that the largest shareholder of the Company is sitting in the room with me right now. So when you talk about --

I'm happy to hear his point of view.

I get it all the time. Second, Bob, I think that you made the observation, when we cut the dividend we knew what this quarter was going to do. Remember that we made the dividend decision in mid-September and we had already received the September rent. So we already had the third quarter revenue results in hand at the time that we made the dividend decision.

The decision was made, I go back to that -- to the concept of long term. We think that the best way to maintain long-term value is to create sustainable dividend payment. And it was our view that by reducing the dividend to this level for this period of time, while we were going through the uncertainty with GPMI, that we were moving towards what we thought was a very sustainable dividend level and that we hope to be able to maintain while we work ourselves through what we were pretty sure was going to be a rocky fourth quarter and thus far has proved to be, and keep our powder dry and be in a position to do that.

I completely [guess], believe me, as I said, the largest shareholder is in the room with me. I completely guess the fact that we have an obligation to pay dividend. We completely guess that we want to bring back a higher ratio to AFFO, but we really need to get a better understanding in what we hope is a short to immediate term issue with respect to GPMI.

Can you go back to giving shareholders a sense of what a longer-term dividend policy with specifically at some connection with AFFO, I mean, right now, you're under 50% of AFFO. So --

I think the answer to that is, it's our intention in the future, when we have more certainty in what our revenues are going to be, to provide exactly that kind of guidance. But at this point, I just don't think that we have enough set certainty our self to be able to provide you with that guidance.

Right. All I can say is that's hurtful.

I know it is.

Hurtful.

[Steven Young], CIBC Wood Gundy.

Hello, good morning.

Hello.

The environmental expenses, in case marketing cannot pay, how much is the share of environmental expenses they have to pay and what Getty has allowed? Is there any breakdown recently?

We have posted in our disclosure that we estimate that their environmental expense -- their environmental liability is somewhere in the $15 million to $20 million range. We do not have any direct information from them. With that respect, we've obtained that estimate based on our assessment of publicly available information. And if they were unable to pay those expenses, then by very nature then we would have to pay them.

But I would want to stress that that does not mean that we need to write a $15 million or $20 million check one day in March, say next year or -- what we would have to do is assume those expenses and just as we pay our own environmental expenses this quarter at the rate of $1.7 million, we would have to pay those expenses over time as the remediation occurred.

Thanks very much.

(Operator Instructions) John Deysher, Pinnacle.

Hi, good morning. Back to the quarterly results for a second, could you give us an indication of what revenues and operating income were without the addition of the 125 new properties? In other words, what's an apples-to-apples comparison for the quarter on both revenues and operating income, again excluding impairment charges in the $11 million.

I learned 30 plus years ago, when I came into the business, not to do math in my head, but my -- I could give you the algebraic formula, which would be to multiply our numbers by 0.72, which is to say, just reduce our numbers by 28%.

Okay. So multiply the revenues and the operating income by 0.72?

Yes.

Okay.

That gets you close enough.

All right. That's fine. Could we follow-up with the CFO offline, if we need to?

Absolutely.

Okay. Great. The normalized interest charges are the interest charges that you said would probably go up. I'm just wondering what kind of guidance you can provide in terms of what the interest rate is right now and what it's going to [lend]?

Well, right now, we are at a LIBOR spread of, I think, it depends on where we are, but 100 basis points to 125 basis points. And I think we're probably going to a higher number, which is say between -- you see the [promise] my bank goes into this too. So, I think we're going to a number that's -- let me suggest, on the order of 300 basis points to 350 basis points, but you're making me vulnerable here.

Okay. And you'll get to 300 basis points to 350 basis points, when?

When we renegotiate our bank line, which we are currently in discussions with our banks in right now.

When does that loan expire?

March of 2012.

March 31? Okay. And the LIBOR you're benchmarking against now is what three-month LIBOR?

30 day.

30 day. I think you need a microscope to tell the difference between the two of them.

Okay. Well, I just want to be specific. 30-day LIBOR plus one in the quarter, okay, that's fine. The November rent, today is November 1, I'm just curious at what point -- how many more calendar days have to go by before the November rent is considered to be in default?

Three quarters?

No, at the end of today.

No, at the end of today. That's why I said three quarters of a day.

Okay. So it's actually due --

Tomorrow, tomorrow morning.

All right. Tomorrow morning. But -- okay, so there's no grace period. It's in default.

Well, there's a -- it gets sort of complicated. There's no grace period, but we can't do anything about it, until we provided them with notice of 10 business days. And tomorrow morning, first thing that notice will go up, assuming that we don't get paid tonight. I mean, we may get paid tonight in which case we won't send the FedEx envelopes.

Okay. I'm sorry, what does the 10 business days refer to?

The notice that we have to provide them before we can exercise any remedies.

Okay. That has to go out and then you have 10 business days to actually declare a default?

I think you've got some of your legal concepts a little convoluted. Why don't we follow-up offline, so we don't --

It's fairly a basic question, I mean maybe you can enlighten us, what does the 10 days mean?

At the end of the 10-day period, we can move to evict them.

Okay. That's very simple. And finally when is your Q going to be filed?

Next week.

Next week. The week of -- okay. Good luck to you.

Thank you.

Anthony Paolone, JPMorgan.

Yes, thanks. Just the G&A, you mentioned it being a bit elevated because of everything that's going on. Just wondering if you can just get a little more specific on what we should expect over the next few quarters there?

I would say as much as another $300,000 to $500,000 a quarter.

On top of what you did in 3Q?

Yes.

Okay. Then I think you got everything else. Thanks.

You're welcome.

Jeffrey Lau, Sidoti & Company.

Hi, good morning. And a continuation on that question, and you expect those increases for the G&A to last how long, just for the rest of the year or until --

I think until we get resolution out of the GPMI situation. That's kind of what the number is, and the number could increase if the intensity of what was going on with GPMI were to increase.

Okay. Understood. Thanks.

(Operator Instructions) Roger Liddell, Clear Harbor.

Yes, good morning. My question involves the nature of the properties shown on the website as for sale?

Yes.

Are these all from the GPMI basket of properties, or at least are they well represented in those for sale items?

The vast majority of those properties are properties that are currently in the Master Lease. The GPMI had asked us to market for sale, and we've said that we'd be happy to do that and reduce their rent upon the sale of those properties, the closing of the sale of those properties. I stated vast majority because there could be one or two that are not in the Master Lease. I haven't actually gone through that one by one myself.

So that's 85 of them. That's a meaningful percentage of the troubled, the extremely troubled properties?

Yes, I think what you could say with those and we disclosed this. Those represent the properties whose tanks have been [fulled] and have no tenants in them.

Great. Okay. And my second question. I'm not sufficiently conversant with the IRS mandates on distributions to remain qualified as a REIT, particularly with the GAAP inflicted items that you must report. Can you help educate me on whether a time will come when the distribution rate would be pushed upwards simply to remain qualified as in REIT?

Yes, that's a good observation. Time will come when it is possible that we would simply have to make a larger distribution in order to maintain our qualification as a REIT under the income distribution standards. The issue has to do with the accrual of revenues, which you sort of alluded to, but I will point out, is different for tax than it is for GAAP, but they're close enough. I don't want to try and suggest that they're not.

And then the other thing is that the rules with respect to distribution themself, you get nine months of lag time. So for example, the distribution that we make in January of 2012 and in hopefully April of 2012 can count towards our distribution requirement for 2011. But you can't double count it. So what you're doing is you're creating essentially [how bolder] you're pushing uphill all the time that eventually you're going to have to do something, but it doesn't create, there is no immediate issue that would probably have to be dealt with for, let's say, at least the next 18 months. Does that help?

Absolutely. Thank you so much.

Anthony Paolone, JPMorgan.

Sorry, I just had one more here on these potential asset sales. Is there some sort of a -- since [they're happy] and I'm not sure there was originally an allocation of rent across all the GPMI properties. There was just some sort of a formula or understanding as to what the rent reduction would be upon the sale of any assets?

Yes. Generally speaking, I don't want to get into the numbers, but I'll give you the concept. The concept is, generally speaking, we have a pretty good idea of what we can reinvest capital out, Tony. So what we're doing is we're saying that if we get back to $100,000 and we can reinvest that in a property and get X% return, we'll reduce your rent by X% of $100,000.

Got it.

We end up in a revenue neutral position. And they end up ahead of the game because they're not collecting any revenue on that property and they're paying real estate tax and maintenance on that property.

Got it. Okay. Thank you.

Sure you don't have any more of the Colombo thing to do here.

Justin Meng, V3 Capital.

Hi. It's actually Charles Fitzgerald. I had a question for you on the relationship -- well, first on, just on Marketing, in your filings there was a mention that they lost a award to Bionol for $230 million. I was wondering if you could give any update on what's going on with that award? And also any update on Marketing's balance sheet? There hasn't really been any disclosure historically on how that company is actually setup, and I was just wondering if you could comment on that?

With respect to the award, an arbitration panel gave in fact award, Bionol $230 million judgment against, or excuse me an award against GPMI. That -- the Bionol, which itself is in bankruptcy, is in the process now in its own bankruptcy court of getting that award confirmed into a judgment in that process, proceeds along its normal pace. But I had made the comment earlier that the judicial system is the only thing slower than the legislative system, so it takes a long time to do.

With respect to GPMI's balance sheet, we have seen some information from them, but it is, at this point, we have no way to verify its accuracy. And in fact in the most recent information they've given us, they told us that the information they've shown us is subject to material revisions without -- they generally told us what those revisions might be, but they haven't specified what they are. So it's difficult to comment on their balance sheet.

If there was a situation where Marketing were to default and you guys were to take the assets back. What would that do to your line of credit and any of the covenants you might have in the company?

It depends on the nature of the default in taking the assets back. It's possible that we would trigger. As a result of that, that could cause some covenant triggers, but it's not clear how that would work itself through and what it would all mean. It's not something that keeps us awake at night.

Okay. Thanks a lot.

Jeffrey Lau, Sidoti & Company.

No, I'm good. The question was asked. Thanks.

At this time, there are no further questions left in our queue. I'd like to turn the call back over to Mr. Driscoll for any closing remarks.

Well, thank you for your continued interest. Certainly, it's very interesting from us from our standpoint here. We look forward to hearing from you perhaps in Dallas or next quarter, when we have more information. Otherwise have a great day.

And this does conclude today's conference. We appreciate your participation. You may now disconnect.