Getty Realty Corp (GTY) 2013 Q1 法說會逐字稿

Good day, and welcometo the Getty Realty Corp. first quarter 2013 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Joshua Dicker, Vice President, General Counsel and Corporate Secretary. You may begin.

Thank you. I would like to thank you all for joining us for Getty Realty's quarterly earnings conference call. Yesterday evening the Company released its finance results for the quarter ended March 31, 2013. The 8-K is available in the Investor Relations section of our website at gettyrealty.com.

Certain statements made in the course of this call are not based on historical information and may constitute 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 from those described in the forward-looking statements. Examples of forward-looking statements include those made by Mr. Driscoll regarding the financial guidance for calendar year 2013 and the Company's acquisition prospects.

We caution you that such statements reflect our best judgment based on factors currently known to us, and that actual events or results could differ materially. I refer you to the Company's annual report on Form 10-K for the fiscal year-ended December 31, 2012, 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 under takes 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.

Thank you, Josh, and prior to starting my formal statement I want to mention some of the other officers of the Company here on the phone with me today with Josh Dicker. Mr. LeoLiebowitz, our Co-Founder and Chairman, is with us. Our Chief Financial Officer Tom Stirnweis and Kevin Shea, our Executive Vice President are all on the call.

And good morning, everyone. Welcome to our call for the first quarter of 2013.

I actually went back and counted to make sure, so I can confidently state that this is our ninth quarterly earnings call since our former major tenant, Getty Marketing, began moving down its unfortunate path towards liquidation. Marketing's [astare] dominated my remarks and our results in most of those prior quarters and are still with us today. Whether it was their bankruptcy, their repossession of the portfolio, and even now as we continue to work on the repositioning, our consistent theme these past nine quarters has been Marketing.

But this quarter I think the theme isn't just about Marketing any more. Consider that despite ongoing stubbornly high costs incurred in the reposition in the quarter, our reported results are beginning to reflect the new run rate for the business -- the underlying business that we think us as the new Getty. In addition with our refinancing complete, we have returned our focus back to the path towards growing our Company to accretive acquisition. We are hopeful to be able to report results from this effort to you very soon.

Turning to our earnings release, we reported net income of approximately $10.5 million, and FFO and AFFO $0.25 and $0.18 per share respective on revenues of approximately $24 million. During the first quarter of last year we reported net income of approximately $6.5 million, $0.31 a share of FFO, $0.29 per share of AFFO, on revenue of approximately $27.5 million.

Rather than try -- spending a lot of time trying to create bridge between these two periods, I think it's better to just observe that in light of the all the change that has flowed through our portfolio and the our Company, the comparisons of our current and future results versus prior quarters, even the fourth quarter of 2012, are simply not useful. Rather I think it's more instructive for me to comment about some of the major items this quarter that vary from where we think our run rate will settle out on a future basis.

For example, our revenue this quarter as adversely impacted by lease startups that occurred later in the quarter or mid-quarter than we anticipated. Those leases, which we anticipated would have started at the beginning of the quarter, have commenced now, and the net result was to reduce our overall revenues. In addition, revenues were adversely impacted by low margin -- gas margins realized for properties remaining in our interim my arrangements this quarter.

In addition, expenses remained stubbornly high during the quarter. This mainly came from two areas; legal costs associated with the repositioning related to litigation items, and maintenance costs for properties remaining in our interim supply agreement. We expect the litigation costs will begin to diminish as the year progresses, but we do not expect a material decline until the third quarter. I will discuss action we are taking with respect to interim supply locations further on in these remarks.

On the other hand, our interest [course comps] this quarter were slightly lower than we anticipated going for, reflectingadditional costs inherent in long-term fixed rate portion of our refinance that again closed mid-quarter on February 25.

During the past [few] months we have taken a number of actions related to the properties remaining in interim supply that we believe will provide both near and long-term benefits. Following a property-by-property analysis, we have commenced a process to dispose of approximately two-thirds of that portfolio. While we cannot control the timing of the sale of these non-strategic assets, we believe that the benefit from the disposition will strengthen our long-term outlook.

In the meantime we are changing the terms of the interim supply arrangement on the majority of these locations. We believe this change will increase their contribution to us in the near-term, both by increasing revenues and by reducing our costs.

Following that property-by-property review, we further concluded that may be interest from distributors to [leave] the remain I guess third of this portfolio, and here too we have commenced a process to market these locations. Again, it is our intent to try to maximize the value, but we cannot control the timing of either the releasing or even the outright sale of these locations, should they be sold.

Our other disposition efforts have gathered momentum this quarter, resulting in the closing -- resulting in closing the sale of more than 65 locations year-to-date, a pace of approximately one closing per week day. We will continue to pursue additional sales as we move through the end of the year and reduce the 160 properties, for example, that had no tanks, where we started last year to I much smaller number by the end of this year.

Measurable progress is also being realized in our terminals disposition process, and we anticipate being able to provide you updates as we reach closure.

Environmental remediation areas are another area of focus for us and investor, and a growing [cost] for us, particularly in light of the reposition of the Marketing portfolio. As I have previously stated, GAAP accounting for environmental costs has become very complex. Accrued noncash expenses flow through our impairments and our depreciation and amortization expense.

The headline for environmental this quarter is that our overall liability decreased by approximately $422,000, even though our costs estimates increased by approximately $1.5 million as a result of contamination discovered in the course of tank removals. In addition, during the quarter we actually spent approximately $1.6 million, which is approximately what we anticipated for this seasonally low quarter for environmental spend.

Our general and environmental -- administrative expenses during the quarter were positively impacted by approximately $1.9 million of receipts from Marketing, reflected as a reduction of bad debt expenses, which is recorded in G&A. These receipts actually reduced our reported G&A, which apart from the legal expenses previously discussed, also remained slightly higher than we expect on a run-rate basis.

During the course of the year we expect to see modest reductions in G&A, which will result from our disposition program. However, we also anticipate beginning to incur costs in connection with upgrading our systems to handle the increased level in intensity required by our asset management activities in the coming quarters, [and] most likely will offset any cost-reductions we realize.

Finally, as I mentioned last quarter, we have begun to reinitiate our growth efforts. There remains considerable competition for acquisitions of quality portfolios, and there are fewer large portfolios coming to market than there were in the past few years. We intend to respond to these factors by increasing our marketing efforts and stepping up our creativity while remaining disciplined in our underwriting process.

We're hopeful to be age to provide you with some news on progress in acquisitions sometime in the coming quarters. With that insight, let me ask the operator to open the call for questions, because I'm sure I confused something here and didn't explain it correctly.

Thank you. (Operator Instructions). We will it take our first question from Anthony Paoloma with JPMorgan.

Dave, you mentioned $1.6 million spent on environmental in the first quarter. Can you give us a sense of -- you mentioned that being seasonally low -- like what that number might be over the balance of the year, or where you think the run rate is?

It's seasonally low because it's winter, and you're talking about actually going outside and digging things, and with frozen ground and things like that you can do less. I think the general pattern, Tony, is roughly 20% to 25% of your spend goes on in the first quarter, if that gives you some way to do some multiplication.

Okay. And is the $1.6 million -- I know the environmental item on the income statement itself has some items within that, but is the $1.6 million like in addition to that type of a number, or if we're trying to think about the cash flow, do we add back the environmental expense that's on your P&L and take out the $1.6 million? Does that make sense?

I think -- you can't add back the entire -- you want to add back the environmental administration expense net of the increase in the liability and the accretion, and then you could -- then you would be doing the correct -- I think to get to like a pure cash number, then I think you're getting closer to the correct number.

So would that be the $1.1 million net with the $400,000 I think that you had mentioned?

No. It's a little bit more complicated than that. Maybe what we ought to do is offer to do a little tutorial and put something out on environmental, because it's difficult to like one from here and one from there and mix and match and get to some sort of an accurate number. So if you could let me -- leave that with me and we'll put something on that in the near-term, I think that would be useful.

Okay. That would be great. Another question you mentioned the leases starting later in the quarter. Can you quantify just what we would need to add to the net revenues to capture like the full quarter impact?

I don't have that number at my fingertips. Chris, can you jump on and maybe give us a number there? It's mainly the BP leases that started mid-quarter.

Okay. Those were previously disclosed.

They were previously announced, but it took them a little time to -- just as it takes all large organizations to take -- to actually go from the time they sign the lease to the time they take over the property and start paying rent. It took them a little longer than it does some of the others. That's the thing about working with large organizations.

Got it. Okay. So we will just look up the BP lease then. Then you talked -- I got a little confused over kinds of what's held for sale? Like the 110, like which ones of those are some of the ones that are under interim supply contracts versus --

Let me be clear about that. The 65 dispositions all came out of the de-tanked properties, which I think now we're up around 100 of those have actually been closed and sold.

The 110 are all interim supply properties. Most -- virtually all of those interest have tanks in them, although we're taking some tanks out prior to or with the sales of the properties. So you can consider the 110 to be all essentially new properties held for sale.

Okay. And so that's -- okay. So that is all in discontinued ops in terms of those earnings?

That's correct.

Okay. Your straight-line rent in the quarter, the noncash adjustment [to] FFO is about $2.4 million, and if we go back to last quarter when you gave guidance for FFO and AFFO, if I just take the midpoint, the spread between those two is about $4 million, I think, and so you did $2.4 million in the first quarter. So is that $2.4 million the right run rate, or does that drop off in the next few quarters.

I think for the rest of this year it's probably close to a good run rate. I think it will change again next year. It's not -- the difference between AFFO ands FFO, which is primarily the straight-line rent, it's not a linear curve through the 15 years.

Right. But the $2.4 million over the next few quarters is a good number you think.

Probably a good number for rest of this year.

Okay. And then I know you guys had up for sale the asset on 10th Avenue in Manhattan. Is that -- how is that coming along?

Well, we received a great deal of interest in the property, and we're continuing to work diligently in the sales process, and I'm not sure what else I can say. I do think that you -- I thought we had it listed for less than it was in the report, but I don't want to get snarky about it.

Okay. Well, I hope you get our number then. Thank you for the help.

Okay. You're welcome.

(Operator Instructions). And we'll go to Brett Reiss with Janney Montgomery Scott.

Good morning, gentlemen.

Morning, Brett.

The outstanding landlord and tenant suits that you're having to do, a lot of my lawyer clients complain about, because of lack of funding, that some of the court systems are very slow and some bordering on dysfunctionality. Is that a challenge for you guys in what you have to accomplish there?

Brett, with matters in front of the courts I'm going to only say that I consider the Justice Department to be an extremely effective system manned by people who are doing their absolute best to bring justice on a timely basis for all parties and transactions.

Okay. And just the -- could you just update us a little bit on that fraudulent conveyance action that I think the trustee is pursuing?

The trustee is pursuing a fraudulent conveyance action against -- a fraudulent conveyance and a number of other actions against Luke Oil and the former officers and directors at GPMI. That is moving on time, as it always has been, towards a trial that should occur in the very near future, the next dare I say six to eight weeks, but much more than that I prefer not to comment.

Great. All right. Thank you for fielding my questions.

And we'll take our next question from Josh Bederman with Pyrrho Capital.

A few things here. One, just high level. You mentioned that your revenue was a little low. Your expenses were high, but you don't expect those to really go down, and your interest was a little low. Net-net should we just think of what we're seeing here on that front just kind of as a good run rate in terms of revenue, operating expenses and interest expense kind of offsetting each other?

No, I think that the net-net -- we are hopeful -- let me put it this way -- that net-net it's -- there is an upwards slope on that curve (inaudible -- multiple speakers) --

Okay. So we're talking like $300,000 or something on a net basis?

Yes. My answer [is this is the -- you want to begin to] see the run rate here, but this is not run rate. That would be my comment.

Okay. So it should be a little higher there, but then your G&A was about $2 million, artificially low. So net-net on the run rate basis, at least for the near-term, we should see your kind of bottom line about $1..5 million lower?

Again, I think net-net going forward in the near-term, I think the bottom line is again an upwardly sloping curve.

Upwardly sloping even -- okay. Even after accounting for that G&A thing?

Yes.

Oh, okay. All right. Thank you. And then next, can you comment on the acquisition pipeline?

As I said, it -- in contrast to years past there seems to be less certainly large portfolios out there. There are other portfolios out there. We've identified some. We're working very diligently on those.

There's also more competition out there. That's no surprise to anybody in the finance business. Ben Bernanke has seen to it that there's plenty of cash around for everybody. But we are work very hard in a disciplined fashion towards bringing what we think are quality properties into our fold that can be acquired on and accretive basis for our shareholders.

And how big are these portfolios that you are looking at?

They range from an aggregate of $4 million or $5 million on the low side to -- I don't think something is $100 million, but certainly more than $50 million on the high side.

Okay. And sorry, just jumping back to my first question. I was just kind of writing this down, and I'm trying to figure out exactly how the bottom line could be going up if you're talking about, let's see, interest expense that, in and around -- sorry -- a few million dollars. That was a little low, so that goes up by -- can't go up by that much. Revenue that's $24 million. You're talking about one piece that kind of goes up by -- it can't be more than $0.5 million or $1 million, but your G&A goes up by $22 million. I don't really see how you guys

I'm not sure where I -- I hope I didn't communicate that I thought our G&A was going up by $2 million.

Well didn't you say you have $1.9 million of receipts from Marketing that were one-time?

Yes, but there could be additional receipts coming from them, and at the same time there are we think reductions in the G&A line that could occur that would be on that order of magnitude.

I see. Okay. So when you talk about a run rate for G&A, this quarter is good, it's not this quarter excluding the one time of the $1.9 million

That's -- I think that's correct, yes.

Okay. Thank you. And then last thing, you guys received a letter from US Representative Jerrold Nadler about representing a bunch of the tenants who -- operators who have grievances about commissions that they're receiving on gallons of gasoline that haven't changed in 15 years, strikes, et cetera. Can you comment on that, please?

Well, I -- the way I would comment on it is, first, to say we don't comment on it. But I'm going to make a very small comment, which is what you said was we received a letter, I believe, isn't that correct?

Yes. That's right. I read in the newspaper earlier.

I understand. So that's what I read in the newspaper too. What I would ask you if you had seen that letter, would you send me a copy of it? Because we haven't seen it.

Okay. All right. So you did not receive this letter. Have you heard anything from any of the -- from the US Representative's office about this?

I opened my mail every day, and I haven't -- that doesn't mean it didn't come. I just -- we haven't seen it.

Okay. And --

I read in the paper what you read in the paper. Let me -- [that would be the news].

Okay. But have you heard anything from your operators as -- have there been any strikes? Have you heard anything from your operators about this issue?

I don't want to comment -- first of all, they're not our operators, right?Those are operators at stations that are operated essentially by our tenants. And we are -- sure, we're aware that some of the operators have made some moves in the press and done some things, and we respect their rights to try and do what they can for business position.

Much more than that, we're almost not involved in this. We are not involved in this, and so it really wouldn't be appropriate for me to comment.

Okay. All right. Thank you.

(Operator Instructions). We will take our next question from Andrew Jones with Northstar Partners.

Hi. Good morning.

Good morning.

I was just wondering if you could maybe give is some color on the overall portfolio stations -- the non-Marketing stations, how they're doing, and the portfolio in general? Because we're just trying to -- we're anxious to see what you guys are going to look like on a run rate basis, and how close we're getting that, so it might be helpful.

Sure. Non-Marketing stations are doing just great. They're essentially performing as expected, as advertised, solid as a rock. Underlying business pretty much across the board is doing very well in those stations, which is to say that our tenants and even their sub-tenants are performing pretty well.

You see a fair amount of variability, volatility if you will in gasoline margins, which are very important to our tenants and sub tenants. We are in a periods now of pretty positive gas margins, consistent with gasoline prices on the street falling.

And you can -- you guys who -- particularly the people who live in New York, which is where I live and why I can say this -- you can see that quite clearly because, there are variations on the street that I can see just driving around the greater New York Metro Area of almost $0.40 a gallon. And I'm not even talking about going New York to New Jersey. I'm talking about staying inside New York where you've got the same tax [state], which is showing you that some guys are really able to make a margin at the present time in what is otherwise a generally declining gas price market.

Is that what you were looking for?

Yes, andI think -- were you guys going to come back with the number on the revenue impact? Because it would be great to know what kind of -- what run rate revenues are on the portfolio now. I know that there's still going to be moving pieces for the next couple of the quarter, but I would think particularly as you guys are -- if you're starting to look a the acquisitions and stuff, to have the stock reflect the value of what you guys have would probably be helpful in your cost of capital. So I'm just kind of curious if you could tell is more about the run rate revenues for everything that you have leased in a way that you're happy with and will be go forward.

I hear the comment, and we're going to try to provide something that will give you a way to get a handle on that.

Okay. And my last question is, I'm sure you guys are aware of the Valero spin-off, CST Brands. And I was just wondering, they provide quite a bit of information about margins on gasoline sales and seems like some very high numbers. Is any of that instructive for what you guys should be able to do when you have control of the portfolio back and get it repositioned? Or is that just -- is the C store business is very different and not comparable?

It's not that the C store business is different. It's just that Valero is spinning off what is essentially an operating business that derives its revenues and its profitability through the operating business. And we are a landlord who collects rent from people who are driving themselves off the profitability of the fuels business, if you follow what I'm saying.

So we have to understand what their business is and how their profitability works and what their profit drivers are, but we're not -- performance of our portfolio isn't necessarily driven by the same factors that their portfolio is driven on. They put that out there because in order to value their business you need to understand how their profitability works. In order to value our business, we're more of a higher -- dare I say, a higher order predator. We're higher up in the security chain, so that we're insulated from that volatility.

Yes,I get that. I mean, you guys have part of the economics piece that -- of the whole ball of wax that they've got. And I guess just -- but ultimately what people can afford to pay in terms of rent reflects the overall account picture, so I was just --

That's exactly right. And so we take into account that, but -- for example, where the Valero spin-off will depend on its quarterly earnings depend on margins from quarter to quarter, when we locate property, we underwrite it based on three year average margins in order to try and smooth out that volatility. Because we're looking for a baseline level, and then we're looking for coverages over and above that.

Right. Okay. All right. Thank you.

Yes.

Our final question will be a follow-up from Anthony Paolone with JPMorgan.

Receipts, I think you had mentioned that net into G&A. What exactly are those?

Well, the corpus of GPMI -- when they went down they had assets. The nature of those assets is everything from deposits that they had with fuel suppliers to residuals on insurance claims that they expected to collect or reimbursements from environmental tank funds. And as those dollars know into GPMI, they come right back out to us because of our superpriority. When those dollars come to us they are booked as a reversal of the bad debt expense that we took back in 2012 for the Marketing rent that we booked as revenue but did not receive.

Okay. I understand. Do you have any guess as to what ultimately you think you will recover there?

Ultimately the superpriority, which started at around a number in excess of $10 million, I think is recoverable in its entirety from these kinds of things, but it will take several years.

Okay. So the first quarter suggests then you got about another $8 million or so to go?Is that the way to think about it?

I think that's about right, yes.

Okay. Great. Thank you.

This concludes our Q&A session. I would now like to turn the call back to management for any additional or closing remarks.

No, otherthan to thank you for your time and your interest in our Company, we are -- we look forward to being in contact soon, and hope you all have a great day and a great weekend.

This concludes today's conference. Thank you for your participation.