Getty Realty Corp (GTY) 2013 Q2 法說會逐字稿

Good day and welcome to the Getty Realty Corp. second quarter 2013 earnings conference call. This conference is being recorded. At this time I would now like to turn the conference over to Mr. David Driscoll, CEO and President. Please go ahead.

Thank you, operator. Our General Counsel, Josh Dicker, cannot be with us today. So I'm going to play his role as well as my own and just talk to you a little bit about the disclaimer which is first to thank you all for joining the quar -- Getty's third -- or second quarter 2013 earnings quarterly earnings conference call.

Yesterday evening, the Company released its financial results for the quarter. 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 including those that I may make regarding financial guidance for calendar year 2013, expected asset sales, and re-investment of proceeds, cost reductions, future Company operations, run rate, stabilization 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 more detailed discussions of these 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 that call.

With that, I would like to start my formal remarks and then we'll move onto questions. We have achieved a number of significant milestones since our last call. And I want to make sure that I highlight both the headline events and some of the longer-term implications for each of them for you here today.

The biggest event, of course, was the settlement of the Lukeoil litigation. Given the legal nature of this, I need to refrain from making any detailed comments more than to say that we are satisfied with the result and are moving on.

The headline is that we expect the settlement to result in approximately $32.5 million of gross proceeds and possibly more later as unsecured claims are adjudicated and distributed to unsecured creditors.

In addition, the timing and revenue recognition around the settlement effectively moots the entire technically-driven waiver issue in our credit agreement. We are and have been in compliance with that agreement and the previously disclosed waiver provisions are no longer in effect.

Furthermore, longer term the settlement will almost immediately result in reduction of significant legal and costs we were incurring in connection with this litigation and enable management to commit additional time and resources towards our operations and pursuing additional avenues of growth going forward.

Speaking of opportunities, we successfully completed an accretive acquisition of 36 properties for approximately $72.5 million during this quarter. These properties are located in highly desirable metropolitan areas around New York City and Washington, D.C. We are particularly thrilled with this milestone, as it marks our return towards accretive acquisition growth.

Going forward, we remain committed to growing the Company. We intend to look at both existing and new paths to achieve that growth, while staying mindful of our core industry focus, the macro-environment, and the competitive landscape that we operate in.

Additionally, we continued down the path of judiciously recycling capital and utilizing proceeds to fund the May acquisition and reduce our outstanding debt. To that end, we completed the sale of one of our New York City locations, 24th Street and Tenth Avenue, for approximately $23 million. The sale attracted considerable interest and the price exceeded our expectations.

With effort and forethought, I'm also pleased to report that we had previously structured this sale as a reverse 1031 against our May 2013 acquisition. That means we will not recognize any gain on the sale and essentially have already re-invested the net proceeds into the accretive acquisition we did in May.

The return on re-invested proceeds on that particular location is expected to be approximately nine to ten times the return we were earning on the location prior to its sale.

Beyond the 24th Street sale, so far this year we have closed the sale of approximately 80 properties, including three terminals, generating approximately $28 million of proceeds. Virtually all of these proceeds have also already been re-invested.

Our remaining transitional properties generally had a net negative contribution of approximately $2.5 million during the first six months of this year. We are aggressively repositioning these properties either through releasing or dispositions. And I expect to be able to report significant progress in this effort in the coming quarters.

Turning to our operations, we reported revenues of approximately $25 million for the quarter, which was comparable to the prior year quarter. Net income for the quarter was approximately $12.7 million, or $0.38 per share of FFO. And the AFFO was $0.34 and 36% per share, respectively.

Our net income is distorted because of the positive impact of some of the Lukeoil settlement that was booked in the quarter and the high volume of disposition activity. FFO and AFFO are not impacted by dispositions but both have approximately $0.19 per share of Lukeoil settlement in them.

We anticipate that additional one-time benefits will contribute to our results in the third quarter of 2013 as well. The settlement and the dispositions are positive events but we are also mindful that none of these increases are run rate transparency. I want to offer the following help with that.

Revenues for the second quarter are about where we anticipate they will stabilize going forward before taking into account re-investment of proceeds we realized from dispositions or new leases occurring in the second half of 2013.

Expenses remain high during the quarter. This mainly came from three areas -- rental property expenses, G&A, and allowances. Reflecting dispositions that occurred earlier in the year, rental property expenses are already reflecting an approximately $1.1 million decline from Q1 of 2013.

While we are making progress, we are not ready to provide guidance on the G&A yet but anticipate our efforts will be focused on reducing this expense as we move forward. What I can share about G&A is that it will decline in the latter half of the year, most tangibly from a reduction in the litigation expenses that were being incurred in connection with the Lukeoil litigation.

During the quarter, we also announced that we plan to take certain charges related to our lease with NECG Holdings. This lease has been materially impacted by the dissident Connecticut dealers.

We have essentially won the litigation against those dealers completely in Connecticut Superior Court but enforcement now has to await an appeals process. As a result of these interminable delays, we have elected to clean the deck completely with NECG and are engaged in a total restructure of their lease.

Included in this quarter's G&A was a previously disclosed bad debt reserve associated with that lease of $1.2 million and we also booked a $1.5 million non-cash allowance for deferred rental revenue in that lease, both of which are one-time charges.

We remain confident that the litigation will be resolved in our favor and that we will be able to successfully restructure the NECG lease, thereby increasing the revenue from this portfolio while eliminating the associated litigation cost. But we now anticipate this may not occur until 2014.

On the environmental front, our environmental remediation efforts are another factor and growing cost for us in light of our repossession of the marketing portfolio. As I previously have stated, GAAP accounting for environmental costs has become very complex.

Accrued non-cash expense flows through our imparent -- impairment and our depreciation and amortization expense. The headline for this quarter is that our overall liability decreased by approximately $500,000, even though our cost estimates increased by approximately $2 million as a result of newly discovered contamination discovered in the course of tank removals.

In addition, during the quarter we actually spent approximately $3.7 million, which is approximately what we had anticipated for this seasonally warm quarter for environmental spend.

Turning to our acquisition pipeline in what is undeniably a frothy financing market, we are seeing new and keen competition for financing of quality portfolios. There are fewer large portfolios coming to market than there were in the past few years.

We are mindful that we are a long-term investor and intend to respond to these factors by increasing our marketing efforts, stepping up our creativity and remaining disciplined in our underwriting process.

Finally, I'd like to address our guidance that we provided at the time of our fourth quarter release. Given the proceeds from the settlement, we may exceed our previously provided FFO and AFFO guidance for 2013.

However, due to certainties surrounding the timing of the proceeds, the amount to be received and the characterization of the income, we are not prepared to update our guidance at this time. Once we have more clarity, we will provide an update.

So that's the end of my formal remarks. With that, I would ask the operator to open the call for questions.

Thank you. (Operator Instructions) Yasmine Kamaruddin with JPMorgan.

I just have a few questions. So, first on the NECG issue that you have right now. How many properties exactly are leased to NECG in total?

I think it's 82, I believe -- 80 --

So 82.

-- 84.

Oh, 84. Okay.

It's 84.

So according to your release, 26 of them are problematic. Is that it?

Approximately 26 of them are tied up in the litigation in Connecticut. That's correct.

Okay. All right, great. So for these 84 properties, what is the total cash and gap rent on an annual basis?

I'm not sure we've provided those numbers. And so I don't want to necessarily just blurt them out on a call right now. But I can --

Well, you can also tell me per property what is the average cash and gap rent?

It -- my recollection is that the gap rent number is on the order of $5 million to $6 million. I don't know that I -- we can be any more precise than that.

Okay. All right. And no color on the cash rent?

Just like I said, we decided that we're going to sort of sweep the whole deck on this thing and rewrite the lease. So I think on a going forward basis we'll make a disclosure when we get that restructured, which will give you a better idea what the run rate is.

Okay. All right. So for these 26 properties in litigation, is it fair to assume that these properties will be removed from the lease?

No, actually, I think it's fair to say those are the ones that are going to stay in the lease. It's a very complicated situation because these 26, while they represent only approximately a little over 25% to 30% of the entire portfolio, on accounts basis probably represent 75% to 80% of the value of the portfolio on a value basis.

So that, like I said, this is a very complicated situation. And it -- the likelihood is in fact those are the properties that will stay in the restructured lease once we get through -- and get the -- frankly, get occupancy of the properties back. And our tenant, NECG, can do the kinds of repositioning of those properties that it wanted to do in the first place.

Okay. All right, got it. All right. And, well, I know you said before that you didn't want to comment on the cash and gap rents specifically. But do you have any color on, as we -- as you go through the litigation what will those numbers be?

No. Not at this point, because we haven't finished our restructuring of that particular lease.

Okay. All right. Now, moving forward to property expenses. So for the second quarter I noticed that it declined (inaudible). So which means that your NOI got better. So that's great.

So is that a good NOI run rate at this point for the properties that you have in your portfolio?

No, because the -- you see, the decline occurred because during the quarter what we were doing is we were disposing of -- and even during the first quarter -- we were disposing of properties that were mainly a drag and incurring most of the maintenance and other expenses in the property operating expense.

So what you're seeing now in the reduction there is the effect of the dispositions or the re-lettings of those properties. That process, which you're seeing reflected in this quarter, reflect properties that were disposed of in the -- really in the first quarter and, frankly, even in the fourth quarter of 2012. And at the beginning of the second quarter.

And you're going to see that continue to ripple through that line with the number going down as we continue to dispose of properties through the rest of the year. I'll go -- also make the additional comment that we expect that the pace of dispositions will, if anything, accelerate between now and the end of the year.

Okay. All right. So essentially the $1.1 million decline in property expenses may even be bigger for the third and fourth quarter.

We -- that is what we hope.

All right. Sounds great. And those are all my questions. Thank you.

You're welcome to ask -- come back if you've got anymore.

Okay. Thank you so much.

(Operator Instructions) And we have no further questions at this time.

Okay. Well, thank you all for joining the call. Thank you all for your continued interest in our Company. And we look forward to talking to you again in the fall.

And that does conclude our conference. Thank you for your participation.