Getty Realty Corp (GTY) 2013 Q3 法說會逐字稿

Good day, and welcome to the Getty Realty Corp. third 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. Sir, you may begin.

Thank you. Prior to starting the call, I'd like to thank you all for us for Getty Realty's quarterly earnings conference call. Yesterday evening, the Company released its financial results for the quarter ended September 30, 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 financial guidance for calendar year 2013, expected asset sales, cost reductions, future Company operations, run rate, 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 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.

Thank you, Josh, and good morning, everyone. Welcome to our call for the third quarter of 2013. We remain on a consistent course that we charted earlier in the year -- lease or sell our transitional properties, reduce our operating expenses, redeploy capital and accretively grow our company. I will go through the highlights of this shortly, but first, I want to quickly comment on the results for the quarter.

Our third quarter results reflected the material benefit of the Lukoil settlement that we announced earlier in the year. The settlement was accounted for in a variety of ways, which are described in greater detail in our 8-K earnings release. But the headline number is that we received just shy of $32 million of distributions from that settlement, with the possibility of additional receipts coming in in the coming quarters.

Our reported revenues were approximately $29.2 million, which after adjusting for approximately $3 million of the settlement income that was accounted for as revenues, was comparable to the prior quarter.

Our net income for the quarter was approximately $42 million or $1.25 per share, which equates to FFO and AFFO of $0.63 and $0.55 per share respectively.

All of these results reflected material, positive impact of the Lukoil settlement and that was booked in the quarter.

Net income also includes gains from our disposition activity in the quarter , which was mainly driven by the sale of a major terminal and our 24th Street location in Manhattan.

In addition, the quarter included several one-time charges, some of which are directly related to the Lukoil settlement, and some of which are independent of it.

When the impact of the Lukoil settlement and the dispositions are removed from our results, FFO per share and AFFO per share were $0.12 and $0.04 respectively after accounting for these charges.

We think it was a very good quarter and the settlement is the result of a great deal of hard work by a great many people. At the same time, we acknowledge that these results also obscure presentation of our core run rate. We believe now that as we move forward, there will be far fewer one-time events to obscure these run rate levels in the future.

As we move forward, we remain focused on driving down expenses. To that end, we're starting to see success in this area that is reflected in our third quarter results. For example, third quarter rental property expenses and G&A, even after backing out the effect of the settlement, were all measurably lower when compared to the prior year and the prior quarter, reflecting dispositions and reletting of properties as we move forward.

The good news is that we're still in the early process of achieving these expense reductions, which will help contribute to future bottom line performance as we move forward.

We are also having great success recycling capital and leasing our properties. We closed or relet 17 locations during the quarter and an additional 25 locations and the last of our large terminals during the month of October alone. Virtually all of these locations contributed to losses to our bottom line. So these sales and leases contribute immediately on a marginal basis.

There is little new to report on the lease we're restructuring with NECG, which covers most of our Connecticut-based operators. NECG continued to perform on our interim restructuring. But we will not be able to conclude that chapter until the Connecticut State Appellate Court has ruled on the appeal action brought by the dissident Connecticut dealers covered by the NECG lease.

These dealers lost their case at the trial level, but continue to squat on our properties without one our permission. We do not expect the appeal to be ruled upon until some time in 2014. But we remain confident that we will prevail in the end.

Our environmental remediation efforts are another area of focus for us, following the repossession of the marketing portfolio. As I previously stated, GAAP accounting for environmental cost is very complex. Accrued non-cash expenses flow through the impairment and depreciation and amortization expense.

The headline for this quarter is that our overall liability remained constant from the prior quarter at approximately $45.2 million. Our cost estimates increased by approximately $4 million as the result of contamination discovered in the course of tank removals. But during the quarter, we also spent approximately $4.4 million, which is approximately what we had anticipated during this seasonally warm quarter.

Finally, there were also developments with respect to litigation. So we increased some reserve in that area.

We have a solid growth pipeline, despite the challenge of the effect of the easy money policy from the Central Bank. It is our intention to grow our assets, but to do so in a disciplined fashion, taking into account the macro-environment of too much liquidity. We remain mindful that we are a long-term investor and are diligently increasing our marketing efforts, while also stepping up our creativity to increase our assets in a thoughtful and accretive fashion.

Turning to our guidance for 2013, we believe our core run rate, without benefit of settlements, disposition gains in other non-recurring and unusual items, remains in line with our guidance. And if you include the proceeds from the settlements, we have already significantly exceeded our FFO and AFFO expectations for 2013.

We're getting close to being able to provide greater clarity into our core operations. It is our expectation that our fourth quarter results will demonstrate a run rate that will represent a solid starting point from which we continue to grow the Company over the longer term.

With those comments, I would now ask the operator to open the call for questions.

(Operator Instructions) We will go to our first question from Juan Sanabria with Bank of America.

I was just hoping you could provide just a clean run rate number for G&A. It seems like it bounced around a bit, even trying to strip out the one-times you stipulated in your 8-K.

It's going to be difficult to come out and just give an explicit number until we get to the fourth quarter. I can tell you that based on the numbers that we look at, it's lower than, but pretty much in line with what we saw in the second quarter. But I'm not going to go much farther than that.

Okay. That's helpful. Then how should we be thinking about the environmental line? I know there was a big jump this quarter. Is that kind of a normalized number, or is it really kind of a seasonally adjusted number? Because I think you mentioned more work because of warm weather. How should we be thinking about that maybe on an annualized basis to help this strip out seasonality --

I think you've got to --

-- from a P&L perspective, sorry.

Well, on a P&L perspective, it's actually relatively constant, given where all of the lines in the GAAP statement flow through to it on a regularized basis. The spending itself is very lumpy because a lot of it has to do with digging in the ground. And you do digging in the ground when the ground is not frozen, which is mostly in the warmer quarters of the year.

But also, you have the effect of the fact that you can't do any digging in the ground or any of this stuff without regulatory approval. You submit your requests for regulatory approval way in advance. And the regulators get around to giving them to you when they feel like it, so that it's difficult to predict.

So the best answer I can give to you is that it's relatively lumpy. But if you basically look backwards over a period of 10 or 11 quarters, I think you'll see that the lumpiness starts to get to a line that's a little bit more predictable.

Okay. Okay. Maybe I'll touch base on that one again. Then with regard to acquisitions, what kind of assets are you guys targeting? Is it the same sort of assets you're focused on now? Are you thinking about potentially broadening your horizons to other triple net assets?

We remain focused on properties in the convenience and gas sector where fuel supply is a critical component of the operating property. I will tell you if the convergence continues, and quick-serve restaurants start to become more active in the gasoline business, that we wouldn't someday end up with a bunch of Burger Kings that also have gas pumps out front.

But right now, we think that where we can compete, and where we have specialized knowledge -- a special sauce, if you will -- is where you've got the regulatory, the environmental and the other issues around fuel supply that help drive a business. And we think that's a very good niche for us to be in. And we think there aren't a lot of people who specialize in that and we can make money in that niche.

Okay. And then just lastly, with regards to those acquisitions in your core focus area, how should we think about you financing those? And can you just give us a snapshot of where you see cap rates and your cost of debt, given that you do have some headroom there.

Well, our cost of debt right now is publicly available. It varies on a grid basis depending upon how much we have. We have obviously paid down a considerable amount of debt over the last four or five months. And we are, as you say, have a lot of headroom to make acquisitions. So certainly on a marginal basis, our cost of capital is relatively low.

Cap rates themselves have compressed. Quality assets are trading -- really high-quality assets are trading below a 7% cap rate. And I think part of what we're doing, when I use words like being disciplined, is that we're being careful to make sure, with rates that low, that we're making the right acquisitions of the right assets that have good residual values and good prospective upside and coverage.

Okay. So you'll be financing transactions with your line, it sounds like?

For now, yes, on a marginal basis.

Okay. Okay, great. Thank you, guys.

You're welcome.

(Operator Instructions) It appears there are no other questions in the queue at this time. Oh, we do have one that just popped in, Anthony Paolone with JPMorgan.

At the risk of sounding lazy, can you maybe just help us with the 4Q implicit guidance, so that we're not making any mistake and pulling out any of the sort of non-core items?

I am uncomfortable, Tony, going any further than what I said in the call. I think that if you -- we believe that we're in line with the guidance that we issued. First and foremost, of course, we've already exceeded the guidance.

But without the special revenue side, things that we've received, when we look at our guidance, even after taking hits for, frankly, a number of charges that we did not think we were going to anticipate were going to hit. We believe we remain inside where we issued the guidance at the beginning of the year.

Okay. But if I look at that, I think it was $0.94 to $1.02. So if I take the $0.98 midpoint, is it taking out $0.12 for 3Q, $0.34 for 2Q and $0.25 for 1Q or is -- I'm just trying to understand what the actual numbers were that you think of as being comparable to that guidance figure.

I think that when we look at Q3, I don't think that we look at Q3 as something that you can simply strip out the settlement and call it a day. Q3 contained in it, in addition to the settlement -- and some charges, frankly, is a direct result of the settlement. It included some charges that also require stripping out to get to what I would call the run rate, or what the true AFFO number is.

The problem that I -- the awkward part of this is that I can't walk you through that on the phone right now, or in a room next week in San Francisco.

Okay. If I take out the items in G&A, it looked like $6.3 million. How much of that in the quarter would you say is kind of not the real number that we should expect going forward? But maybe still has inflated costs or something perhaps in it.

The safe answer to that, while trying to get you where you want, is more than 10%.

Okay. And then so the actual cash on the environmental side, the actual cash out the door, that was the $4.4 million in the quarter?

Yes.

Okay. Was there any just general cap ex that you spent in the quarter on assets?

Diminimus. You'll start to see more of that as we go through with some of the new leases we signed, the tank replacement cycle. A great deal of that requires all sorts of regulatory approval, not only at the state level, but at the local level. If you want to do a major renovation, you've got to get the town's permission.

So you'll start to see that, I think, occur in 2014 and 2015, where we will be making cap ex contribution to properties. But they won't show up on the cap ex line. Our obligations have already shown up in the rent line in the straight line -- I mean, it's accounted for as part of straight-line rent. So the technical answer to your question is no.

Okay. And then just looking through the held-for-sale stuff, it looks like post the items after the quarter, you've got 105 assets left to go. One is are any of the 42 properties going through the eviction process considered held for sale, or in that bucket? Or are there all just in consolidated at this point?

I think they're all consolidated at this point. The problem with literal answers to these questions is that with 105 properties, I can virtually guarantee you that a handful of those are in an eviction process. They may not be in the Connecticut eviction process. But when you have that large a number of things, when you're dealing with street-level assets, you're going to have the whole spectrum of properties inside that portfolio.

Okay. And any sense as to what the 105 left is worth, just rough brackets around just value?

I'm going to dodge the question by saying probably, but I actually have not looked at that recently. So I would be speculating wildly to give you an answer on it. But it's not like we don't have the number. I could look at it, and I will try to find some way to give guidance on that in the future but so that everybody can hear it.

Okay. Then given sort of the settlement items and so forth, any sense as to what 2013 taxable net income might look like, just to get a sense as to whether you have a dividend situation or not?

It's a really good question and one that we spend a fair amount of intellectual time on. The best guidance I can give you right now is that it looks like we do not have a major under-over distribution issue with respect to tax. But once you move -- it's incredibly complicated as you move from GAAP to tax and (inaudible) backs and the reductions and everything else. But it's something we're very much on top of and we monitor quite continually.

Okay, great. Thank you.

We'll go to our next question, Joe Furst with Furst Associates.

I think you've sort of partially answered my question. I just wanted to ask about at what point do you think you might be able to raise the dividend, at what stage in this and over the next few months of what you are doing?

Gee, that's the kind of question that guys on our end of the phone have to find a nice way to answer. The board, when it meets, always considers the relevant dividend levels and will consider raising or maintaining the dividend, based upon what we think our current performance is, and what our prospective performance is. But to say much more than that is -- just not going to do it, sorry.

Sure, that's fine. And congratulations on the good work you've done so far. We really appreciate it as investors.

Well, you're welcome.

We'll go to our next question from Josh Biederman with Pyrrho Capital.

I just want to follow up on that a little bit. You mentioned your comment on potentially maintaining or raising the dividend. Can you give us some color on what you guys ideally would like to have as kind of a payout policy? If I go back to Tony's question, $0.98 of midpoint guidance, if you had $0.25 in the first quarter, $0.34 in the second and you reported $0.12 in the third. You are saying that there's probably some charges in there that you would take out relative to that guidance.

Well, even if you don't take anything out, that leaves you with $0.27 of AFFO in the fourth quarter -- or sorry -- of FFO. You've had an $0.08 deduction in the third quarter between FFO and AFFO. So even if you don't add back any of those charges for the third quarter, I see that you're not covering your dividend on an AFFO basis for the fourth quarter.

Likely, that's actually going to look worse, given that you're adding back some of the third quarter charges. So what do you think about dividend coverage and what's your policy for payout going forward?

I think a couple of things, if I could answer them.

Sure.

First, we pay a lot more attention to AFFO than we do FFO.

Okay.

To be honest with you, don't pay a lot of attention to FFO.

Right.

I don't want to be cavalier about that, but given the effect of straight-line rent, which is the big difference for us between AFFO and FFO, we just think AFFO is a better number.

Right, I would agree.

Okay. So second, the general policy with respect to setting a core dividend rate is that we want that dividend covered -- taking into account what we think our prospects are going to be over the next, say, 8 to 12 quarters.

Okay.

And I'd suggest that we not only want it covered, but we want it covered by more than -- we don't want to be paying out 99% of AFFO. But I don't want to get into then a debate, well, 98% or --

No, that's understandable.

But we want coverage. And then finally, again, as far as I can go -- and I know how frustrating this is for guys on your side -- at our current dividend rate, I am pretty comfortable that for the fourth quarter, and frankly, for the year on an AFFO basis, even not counting all this wonderful found money -- because I used to refer to this as a lottery ticket and we cashed the lottery ticket -- we're going to cover that dividend.

Okay. Sorry, just to kind of close that loop, that would imply something -- that would imply $0.20 or more of AFFO in the fourth quarter, up from your $0.04 this quarter.

Take a non-answer as not disagreeing with you.

Okay.

We're -- and I also -- things can still happen. There's six weeks left in the quarter.

Right, okay. Thank you.

There are no further questions in the queue. At this time, I'd like to turn the call back over to Mr. David Driscoll.

Well, I want to thank you all for hanging in with us over what has been a long odyssey. And we look forward to next quarter, where I think we'll all have much more to say and can be more direct in answering questions.

And that concludes today's conference call. Thank you for your participation.