Getty Realty Corp (GTY) 2012 Q1 法說會逐字稿

Good day and welcome to the Getty Realty First Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joshua Dicker, General Counsel. Please go ahead, sir.

Thank you very much. I would like to thank you all for joining us for Getty Realty's quarterly end conference call. Yesterday evening, the Company released its financial results for the quarter ended March 31, 2012 and filed its 10-Q with the Securities and Exchange Commission. These documents are available on the Investor Relations section of the website at www.GettyRealty.com.

Certain statements made in the course of this call are not based on historical information and may institute forward-looking statements. These statements are based on Management's current expectations and beliefs and are subject to trends and uncertainties that could cause actual results to differ materially than those described in the forward-looking statements. I refer you to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2011,as well as our quarterly and other filings with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. The Company undertakes no duty to update any forward-looking statements that may be made in the course of this call.

With that, let me turn the call over to David Driscoll, our Chief Executive Officer.

Thanks, Josh. Prior to starting my formal statement, I want to introduce the other officers of the company who are on the call with me and Josh Dicker today;Mr. Leo Liebowitz, our Co-founder and Chairman;Chief Financial Officer, Thomas Stirnweis; and Kevin Shea, our Executive Vice President.

Less than two months ago, we made the observation that it was an exciting time for us, because we had the opportunity to eliminate the overhang caused by our largest tenant, Getty Petroleum Marketing, who I will refer to as Marketing in this call, without having to wait until their lease expired in 2015. I want to say at the outside of this quarter's call, that we have made demonstrable progress towards realizing that objective.

Last week, as we had anticipated, we announced that Marketing rejected the master lease in its bankruptcy proceedings, and we also described some of the progress we have made repositioning the Marketing portfolio. With the rejection of the master lease, we now lease only a single property to Marketing outside the master lease. That single location is a leased property for us, so we earn only a modest spread. Thus that property's contribution is immaterial to our overall performance.

Since our properties constituted the vast majority of Marketing's earning assets, we anticipate Marketing, as a company, will begin a process of winding down its affairs and move towards liquidation in the coming weeks. We now have a large claim against Marketing, and while we are not Marketing's only creditor, we do have a priority position for some of our claim. As a result, it is possible we might receive some funds from their liquidation in the coming months. After that, additional recoveries may occur over a period of time and only as a result of successful litigation. Without meaning to underplay the value of our position or the vigor with which we intend to pursue it, we believe the timing and the amounts that might be recovered are, at this point, speculative.

As we announced last week, we have started to redeploy the assets in the Marketing portfolio on both a permanent and interim basis. The results, thus far, are in accordance with our plans and expectations. And most importantly, we are generating revenues from the vast majority of the revenue-generating assets in the Marketing portfolio.

on April 30th, Marketing leased approximately 780 individual properties and nine distribution terminals from us. We had previously mentioned that approximately 160 of these locations, now 145, as a result of sales, leased dispositions, and condemnations, are being marketed for sale.

We also announced last week that we had entered into six separate long-term triple-net leases with regional fuel distributors, comprising approximately 282 properties of the marketing portfolio. The specific terms of these leases vary, but all are unitary, triple-net long term, which generally means 15 years with renewals, contain provisions for cap backs, and have CPI escalators. Some, dare I say most, also contain provisions for increased rent based on fuel volume increases.

In addition, we have entered into an interim fuel supply agreement with Global Partners LP, and a direct relationship with dealer operators in locations comprising an additional 254 properties located in the New York metro and New Jersey areas, pending entering into long term leases. In these properties, we are responsible for some maintenance, some taxes and insurance. In return, we receive rent fees and expenses reimbursements from dealers and a portion of the fuel margin realized at the locations.

In all but a handful of the remaining approximately 100 locations, we have established similar license and interim fuel supply arrangements, most with our new tenants in a particular geographic area.

With that update on our progress, I'm not going to spend a lot of time reviewing our first quarter results, because the quarter continued to be materially affected by Marketing's bankruptcy. And most importantly, Marketing's contribution was not representative of the contribution we expect to receive and the costs we expect to incur from the portfolio in the coming quarters. This quarter's results are backward-looking at a time of great transition. They will not provide a good proxy for our business as we move ahead.

Nevertheless, this is our earnings call, so I think a few items are noteworthy. Our revenues and expenses from the non-Marketing properties were strong and performed within our expectations.

Cash from Marketing allocated to the quarter amounted to approximately $8 million,which is reflected for GAAP purposes as $18 million of rental revenue, offset by a $10 million charge to G&A for bad debts. I should note that we will retain this accounting convention, that is recording the full amount of revenues from Marketing, even though we don't expect to receive them, and then writing them off until April 30th, which was the day that the master lease was rejected by Marketing.

Operating costs related to the Marketing bankruptcy, comprising legal, accounting and other costs that we believe will diminish over time, were approximately $1 million this quarter.

As we communicated previously, our ongoing general and administrative expenses, net of the bad debt expense associated with grossing up the now rejected master lease, continued to rise to match the increased intensity of our business. However, they did not reach their full run rate this past quarter. In particular, we have added staff and expect to incur costs from outside contractors in the coming quarters, so I would ask you not to try to extrapolate from this quarter'sresults. Over the long term, these costs should decline, as we make further progress on the repositioning process.

AFFO decreased by $6.7 million to $9.7 million or $0.29 per share, as compared to $16.4 million or $0.50 per share for the quarter ended March 31, 2011.

FFO decreased by $4.3 million to $10.3 million or $0.31 per share for the quarter ended March 31, 2012.

These results reflect the underlying strength of our non-Marketing portfolio, and the fact that we generated revenues from Marketing even while they were in bankruptcy, while Marketing absorbed much of their own costs during the quarter.

Net environmental expenses and outlays were stable in the quarter. We saw increased depreciation expense as a result of costs capitalized, related to the Marketing environmental liability we assumed, even though we did not begin making cash outlays until May 1st. This is another item not fully reflected during this quarter.

As we have previously stated, in 2012 we expect cash outlays and appreciation expense will significantly increase because we are now responsible to remediate contamination of our properties that Marketing previously had been responsible for. We're very comfortable that we can manage the remediation process, but we're also still not far along in our planning process to be able to provide you guidance regarding the magnitude of the impact.

Finally, interest costs were approximately $1.5 million, which were inline with expectations resulting from our new credit agreement.

We are slowly making progress with respect to property dispositions. While we continue to advertise for sale or lease approximately 145 locations which have had their tanks removed, we continue to believe we will generate meaningful cash from dispositions in 2012,which we intend to invest in other properties. We only closed two property sales during this past quarter, realizing a net sell gain of approximately $550,000. But the pace of improvement is evidenced by the fact that we have closed five additional sales during April alone.

With that background, I think we should open the call for questions. Before I do, I want to say again that while much work remains, we do not have all the details for you yet. We have also made considerable progress. And I am pleased with where we are, where we are going, and grateful for the contribution and sacrifice our people have and are making.

With that in mind, Operator, please open the queue to see about any questions.

(Operator Instructions). We'll go first to Tony Paolone with JPMorgan.

Thank you, good morning. Dave, I would like to first start with the 282 locations that have been net leased back out. Can you tell us how you arrived at $17 million of net rent? How that compared to what you thought was allocated to those under the Marketing lease? And then just give us a little bit more detail on the credit behind those?

I don't, Tony, have the number about -- how that compares to what was allocated under the Marketing lease. It's obviously, certainly less, but I can't tell you by how much less. Let me see if I can find a way to get that number out in disclosure in the coming weeks. What was the rest of the question?

How did you get to the $17 million? Can you give us a an EBITDAR coverage on that? Or just put some parameters around gallonage, or in-store sales or just how you got to that number -- how you think that's fair?

Well, it was the result, Tony, of a process that we ran. We have divided the entire Marketing portfolio into approximately a dozen individual geographic areas where we thought they were natural for distributors to be interested for, because they provided enough size and enough scale to provide the overhead and the management required for them to manage them efficiently. We then ran a process, we received multiple bids for all locations, and these were the best bids that we received for those particular portfolios, although some of those even represent combinations of portfolios. Those six are seven or eight geographic regions.

With respect to coverages and things like that, the distributors themselves, obviously, ran the coverages because they're putting their credit on the line. It's hard to come up with specific numbers, but they are all I would say - -again, part of why I say it's hard to come up with specific numbers is because everybody going into these portfolios is expecting an improvement over them. But even based on historical, which were very much depressed results, I think that you were looking at 1.4 and above kind of coverages. Does that help?

Yes, it does. What about, just in terms of the way the leases were structured. I know one of the issues with the Marketing lease was that it gave you very little information about what was happening in your own portfolio.

No -- yes, we learned that lesson a long time ago. And all the leases we've entered into, really since 2005, call for tenants to call and provide us with very regular information with respect to how the underlying properties are doing, in terms of volumes, dealer rents or inside sales, whichever is relevant. As well as ultimately, the really key problem that was inside the Marketing lease, which was our requirement to keep that information confidential, so that we could not disclose it.

I will tell from you a larger perspective, the other thing you see us doing is reducing the concentration by moving it to multiple tenants, which also obviates the particular issue. We've got the disclosure, but we also don't have the concentration.

Got it. How would you characterize the 282 locations that you got done, relative to quality across the whole portfolio; were those average, above average, below average?

Average to above average. The properties that have been moved into the interim supply with the Global arrangement are probably higher quality properties. Those are the ones we are more confident that we'd be able to enter into leases. The reason that we have moved into the interim arrangement is so that we can take our time and work through them, particularly the alternative real estate opportunities in the best way. But these were also very high quality properties.

The approximately 100 that were not part of the Global per se in the New York metro area -- and this particular arrangement are probably the bottom half quality properties. Any given one in there isn't, but on average.

And in terms of the 145 that are for sale, it seem like some of our recent sales were around $300,000 a box. What is the expectation for the 145?

We haven't gone there, and for now, I would prefer not to. Maybe what we can do on an ongoing basis is start kind of like what the average sale price we've realized is. Even that, I would caution you on, because as I'm sure you can realize pretty quickly, the higher-value ones will go first. The average should tend it down over time -- or trend down.

Okay. What can you -- I know you said you don't necessarily have numbers on environmental costs, but just how is the environmental process working, in terms of you picking up what was previously the responsibility of Marketing? And are you able to, when you do these triple-net leases with the new tenant, off-load those environmental to them? Or do you keep them, going forward?How does this work.

The environmental contamination on a piece of real estate is ultimately the owner of the property's responsibility. We had, by contract, passed that on to Marketing back in the spin-off in 199. They had retained that liability. Now that Marketing is no longer able to meet its obligations under that contract, then it becomes our responsibility.

We do not expect to be able to pass that on to anyone else. So even when we sell a property or we lease a property, we figure that we're going to be responsible for the existing known and unknown environmental contamination in a property. Certainly, when we enter into new leases on properties, any new contamination that occurs becomes the new leasee's problem. But the pre-existing is ours.

Do you have a sense -- I know it doesn't sound like you have real specifics, but just any sense or ballpark as to what the environmental expenses will run, going forward, now that you have the Marketing assets back?

We're getting our hands around that, still. I think the best answer I can give you is that I'll be able to give you a sense of that number by or before next quarter's call.

Okay. Then the last thing, on G&A and the run rate there, you said it's going to pick up. Do you have any numbers around that or give a sense of magnitude?

I haven't calculated it, so it would be a rough guess. You're looking at something that looks like more -- like 20% or less of the existing rate than anything over that. So I'm not talking about it doubling, or even a 50% increase, but it could be up 20%.

Okay. Thank you.

We'll go next to Jeff Lau with Sidoti & Co.

Good morning. Just a quick question. I wanted to see if there are any updates, obviously, with all that is going on, regarding the dividend?

At this point, we are not in a position to make any comment on the dividend. I anticipated there might be some question about that. We're obviously mindful of the fact that we're a dividend-paying entity, and it's something that is very present on our minds all the time. And something that we're going to actively consider in the coming weeks and months. But at this point, I'm not in a position to comment on it, and would prefer not to until we can.

Okay. And just going back to earlier in your comments, you said you guys have 282 locations on triple-net leases, and then the other 250 for interim arrangements. What -- can you talk about again what the remaining locations are?

Well, you mean the approximately 100 that are not in the 254, 282, or the for-sale properties?

Yes, is that all that's left?

There are only about hundred. For all intents and purposes, they're in pretty much the same arrangement that the 254 are with Global. The difference being that the Global properties, for the most part, are concentrated in the New York metro, northern New Jersey area, where the remaining 99 are really spread over the entire portfolio. Some of them are being currently supplied in the Global arrangements. Some of them are being supplied -- they're in New England --they're being supplied by some of the new tenants in New England or the ones up in Buffalo. The ones in Buffalo are being done by Global. Some of them are in South Jersey, some of them in central Pennsylvania. They're just all over the map.

I think the important thing, at this point, is that we have -- we're generating revenue from them, and we have arranged to make sure that the dealers themselves can get fuel, get competitively priced fuel, get enough volume of that fuel so that the dealers can generate revenues, so they can continue to generate revenue for us.

The bottomline is that all the properties that you received back -- or got back from Marketing, you're getting revenue on, aside from the ones that are being held for sale?

That's correct. I think I said that in my remarks.

Yes, I'm sorry.

But I'm glad you said that, cause it's an important point to underscore. One of the great, dare I say achievements, that we've had here in a very short period of time, is we've been able to transform all but a handful -- and if somebody comes back and asks me, a handful, I think the number is six -- of these properties immediately into revenue-generating assets. And those six, by the way, are in the process of being dealt with over the next couple of days.

Thanks.

We'll go next to Kevin Oro-Hahn with Ingalls & Snyder.

Good morning.

Good morning.

I had a quick question in terms of the gas prices at the pump, which I understand was one of the big issues under the Marketing lease. So we're just tracking here what the prices at the pump look like, and notice that it has gone down in some cases, and in other locations those prices have stayed up, like over $0.10 abovecompetitors.

Yes.

I wonder if you could give any color on that? Are all the Global properties -- have they all been reset at this point? Or is there some variance on that.

I think what you identified is the key to see when a property has been transitioned into a Global property versus has not yet. So over the last ten days, we've been rolling out somewhere between 25 and 30 properties per day that have been going over to Global. And on average the prices at the street that those dealers are offering have been dropping anywhere between $0.06 and $0.25. You have actually described precisely what you should be seeing on the street as that roll-out continues.

Okay. That's great. Really helpful. Thanks.

Yes.

We'll go next to Matthew Feldman with Davidson Kempner.

Good morning. Amended credit agreement references some appraisals that were outstanding as part of the amendment of the 70% LTB ratio.

Yes.

When do you expect those appraisals to come in? And will you be sharing the results?

The appraisal process -- I don't know how much you've dealt with commercial banks, particularly in the post FIRREA world -- but FIRREA puts as close as we have in this world to a forcefield around the appraisal process. So that we know very, very, very little about what is going on inside that. The federal rules are constructed so that we couldn't possibly influence it. But they also make the whole thing completely baffling to us. That is my way of putting color around the fact that we don't know when the appraisals will be completed. We do know that they will be shared with us. We have made no decision whatsoever whether we'll share them publicly or not.

Thank you.

We'll go to Brett Reiss with Janney Montgomery Scott.

Good morning, gentlemen.

Good morning.

You mentioned in the 10-Q that you have contracts to sell -- 12 additional properties. What is the aggregate amount or ballpark of those 12 properties?

I'm not sure what the reference is. Sorry, Brett, but -- let me just take a look.

Is it possible, so I don't hold other people up on the call, that I can talk to somebody offline on that?

Sure, you're welcome to call me.

Great.

I'm running around this week. But I'll talk to you as quickly as I can.

Okay, I just want to make sure I understand. There are only six properties not paying any rent?

There are only six properties that we've not identified an alternative fuel supply for. And by the close of business today, I think that will be down to one or two.

Okay, so you're not having to go through the laborious dispossessed route of any of the tenants?

Not yet. There are some tenants in some places, again I would describe this as a handful of properties, that have decided to try to use the Marketing bankruptcy to improve their position relative to their landlord. We'll use whatever is appropriate legal means to get the maximum value out of our properties. We own the properties,not the dealers.

Right. But if somebody, a tenant, decides to play hard ball, are they able to occupy the property without paying you anything until you go through the landlord-tenant dispossessed proceedings?

All of that, Brett, ultimately is up to the determination of the Court. So far we haven't found that to be the case.

Okay. Now, in the fourth quarter, you made an estimate and accrued an additional $47 million in environmental liabilities that you think you'll be responsible for, now that Marketing no longer there. When you sell -- you mentioned that when you sell properties, we're having to, more often than not, retain the environmental liability. Is that retention of that environmental liability included in that $47 million estimate that you made in the fourth quarter?

Yes, $47 million is the estimated -- best estimated fair market value of our -- the incremental environmental liability and tank-removal liability that we've inherited from Marketing. If the property gets sold, it just stays in that $47 million.

Okay. Now, the $0.19 that you report in this quarter as net earnings;is any portion of that taxable earnings that you, in theory, have to pay 90% of to retain your REIT status?

The $0.19 GAAP --is a GAAP measurement of earnings, Brett. And we don't report, on a quarterly basis, what our taxable income is. GAAP is a reasonable proxy for taxable earnings, particularly in this quarter, where there weren't a lot of straight-line issues going on inside rents. I tell you it's a reasonable proxy, but it's not definitive, because it's GAAP, not tax.

Okay, I appreciate you letting me ask the questions.

We'll go next to Tony Paolone with JPMorgan.

Thanks. There has been articles written about some of the pushback that some of the operators are giving to these new distributors in the debate between doing commission fuel sales versus them being able to set their own prices. Can you maybe talk about how the money is made and not made? And how you fall in that debate -- just to give us a better understanding of how the business really works here?

Yes, sure. First of all, the question of commission dealer versus dealer tank wagon pricing, Tony, is what you're touching on. In one case, the dealer actually buys the gas from the distributer. It's his own credit. He puts it in the tanks himself. He sets the price himself. He decides what kind of margin he wants to make and what kind of volume he's going to pump. Because obviously, if he sets his price more competitively, he'll have more volume. If he sets his price higher, he'll have lower volume.

In the commission-dealer arrangement, the distributer owns the gas and puts the gas into the tank. And the distributer sets the price. He pays a commission, anywhere between $0.07 and$0.12 -- I think is what was cited in the press articles -- to the dealer. In that case -- both are really concerned -- it's much moreof a volume-oriented kind of scheme than the dealer tank wagon scheme.

We are, generally speaking, agnostic about the -- whatever mode of fuel supply goes on in the properties. We're interested in generating the most amount of cash on the long-term basis from the properties. Therefore, we just simply come out on an agnostic basis. Now, we've offered the properties to the distributors on a free and clear basis, which is what they legally are, according to the courts and all of the definitions, for them to decide how they want to operate them.

Some dealers in some places have decided that, no, they would like to operate the way the dealer wants to, even though nobody has yet explained to me any way why they have any legal rights to do that. The important thing for us is that we have leases in place with dealers who are paying, by the way -- have paid us May rent on those properties. While we are cooperating with those dealers -- or with those distributors in dealing with these dealers to try to help explain to them that they don't have any right to do what they are seeking to do, as far as we're concerned, we have an effective binding lease in place with our tenants.

So in instances like Global Partners, they're paying you the rent -- ?

We don't have a lease with Global. Let's be clear about that.

I understand you don't have a lease. But are they paying right now to operate? Or it's the other way around, and you have to get something from the operator in the store?

In the Global -- in the interim fuel supply arrangements, what is happening is that the individual dealer is occupying the property and paying us for occupancy. They're paying us a license fee. It's a kin to rent. We're collecting rent directly from the dealers. In addition, Global is putting fuel into those locations and selling that fuel on a commission basis. So Global owns the fuel. Global is setting the prices. And I made the point in an earlier question, that generally speaking, as Global comes in and takes these over, the prices are coming down anywhere from $0.06 to $0.25 per gallon on a street basis. And then Global is paying a credit card commissions and all the other expenses, and paying a commission to the dealers, and paying us a fee on per gallon basis on the fuel that gets pumped in those stations.

And in turn, your costs, then, remain in things like environmental, taxes --

It's more of a gross lease versus a net lease. Think about it now in terms of a gross lease. We're responsible for some of the maintenance. Not all of it. The tenants are responsible for day-to-day sweeping and cleaning. We're responsible for some of the larger level maintenance. We're responsible for insurance. We're responsible for taxes, even though we do get reimbursements for taxes. But again, it's kind of like a CAM charge. Some of it we get full reimbursement, some of it we get reimbursement over a base. It varies.

Where do you think this arrangement is, relative to where you could ultimately lock up a net lease with a distributer, like in terms of just the level of, call it rent for now.

It varies with margins. So when margins are really good, I think we'll actually make more money under this arrangement. When margins are more towards the tight end, we'll make less money under this arrangement than we would under a net lease. At this point, I will tell you today margins are pretty good.

Then just the last thing, the $47 million you just mentioned, the environmental accrual -- did I understand that right, that's the net present value of what you expect the future environmental costs to be? Just like the $600,000 in the first quarter that you took in environmental expenses -- is that $47 million the incremental NPV of that going forward? Or is that something else.

It's almost like we should do a tutorial on environmental. The $47 million is the net present value of the known environmental contamination. So what it would cost to remediate the known environmental contamination, plus the cost to remove all the tanks on a net present value basis. That's what the $47 million is. The $600,000 represents a change to the estimate of the $47 million. Does that make any sense?

I know the $600,000 in the first quarter was basically your ongoing environmental expenses for the -- that you've incurred --

I'm sorry, you know what? The $600,000 in the first quarter is the -- right, has to do with the legacy portfolio, not the $47 million.

Right. So as you bring in the Marketing assets now, and you would add something on top of the normal legacy expenses each quarter, is that $47 million the NPV of those incremental expenses that we'll see each quarter?

Yes, but we won't be adding expenses. It reflects itself in depreciation -- we'll be depreciating the $47 million. Because the next layer of this is the $47 million causes you to write up your assets by $47 million. You'll see it get reflected through as depreciation expense.

This will actually be different than the legacy assets in the way that it's accounted for?

Both the legacy assets and these assets are going to be accounted for in a different way, going forward, than they were in the past.

So how would -- so how would one kind of step back and look at your reported results and say, how much are these guys spending in cash each quarter just to cover environmental items?

Well, the cash number will be a disclosed item, because it will be in the fund flow statement. And we will highlight that number for you.

But it won't necessarily be on the income statement because depreciation will capture that?

Correct.

Okay. Thank you.

Yes.

We'll take our final question from Jeff Lau with Sidoti & Co.

Just a follow-up on the properties for sale. The 145 is after the five sold in April, right?

Yes.

Okay.

It's the 145 is -- it started with about 162, approximately, nine months ago. There has been lease expirations, condemnations, properties that were eliminated from the list, plus sales, to bring it down to 145.

Thank you.

At this time, we have no further questions. We'll turn the call back over to the speakers.

Well, I want to thank everyone for your continued interest in the company. We always are available to answer questions. We're making a lot of progress, and we look forward to talking to you in the coming months. Thank you all for the call, and we'll talk to you soon.

That does conclude today's conference Thank you for your participation.