Getty Realty Corp (GTY) 2013 Q4 法說會逐字稿

Good day, and welcome to Getty Realty Corp fourth quarter and year end 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. I would like to thank you all for joining us for Getty Realty's quarterly earnings conference call.

Yesterday evening, the Company released its financial results for the quarter and year ended December 31, 2013. The Form 8-K and earnings release are 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, events 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 lease restructuring, future Company operations, financial performance, and the Company's acquisition or redevelopment opportunities. 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 and our annual report on form 10-K for the fiscal year ended December 31, 2013, which will be filed soon, for 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. Good morning everyone, and welcome to our call for the fourth quarter of 2013 and the year ended of 2013.

The quarter and the year reflect steady progress on the objectives we set at the beginning of 2013: lease or sell our transitional properties, reduce operating expenses, redeploy capital, and accretively grow our Company. I will go through the highlights of the earnings shortly, but first I want to quickly comment on the results for the quarter and the year.

We produced solid results for the fourth quarter that resulted in a 9% increase in adjusted funds from operations, to $0.24 per share on revenues of approximately $26 million. Unlike the prior three quarters, and our annual results, our fourth quarter was, as expected, relatively straightforward.

One item I should call attention to is that AFFO did benefit this quarter from approximately $0.02 per share of non-cash, nonrecurring reversals of accruals. In the fourth quarter, we continued executing on our transformation activities, with 51 locations being sold and 15 locations moving into long-term leases.

The bottom line is, progress is still being made, and while we recognize that we still have work ahead to finish the task at hand, the visibility into a core baseline of revenue and earnings is finally emerging. We understand there are still big unknowns, and that we are not yet finished, but we are much closer relative to the past few years.

For the full year of 2013, our results were still impacted by the ongoing transformation, and resulted in AFFO of approximately $44 million on revenues slightly in excess of $100 million. The items that most affected our full-year earnings were the disposition of 145 transitional locations and the settlement of the Lukoil lawsuit.

Dispositions resulted in sale proceeds of approximately $83 million. The high-impact items in this were the disposition of five terminals, and the sale of one of our Manhattan locations for reputedly the highest per square foot sales price ever recorded on the island of Manhattan.

The other major item impacting our results was the aggregate approximately $34 million we received during the year from the settlement of the Lukoil litigation, and other funds from GPMI's liquidating estate. Although we derive benefits resulting from the ongoing repositioning of our assets, and from resolution of claims relating to GPMI in 2013, our results also reflect direct and indirect expenses incurred in connection with these and related matters, including inflated property management costs such as property taxes, maintenance and utility charges, legal and other professional fees, and general and administrative costs associated with holding these low contribution properties.

While we acknowledge that we still have additional repositioning work to do, especially in terms of the number of locations, the work that has been done through the end of 2013 resulted in a measurable improvement and much better clarity, as reflected in our fourth-quarter performance.

Once again, this quarter, there is also little new to report on the lease that we are restructuring with NECG, covering most of our properties in Connecticut. The Connecticut appellate court has not yet ruled on the appeal of the action brought by the dissident Connecticut dealers who lost their cases at the trial level. We remain hopeful that there will be a resolution from the appeals in 2014, and confident that we will prevail.

Nevertheless, this prolonged process has impacted our results relating to the NECG lease. We will not be able to achieve a permanent resolution until this ruling is made, and we have now concluded that the lease will require a fundamental restructuring. As a result, we took a non-cash reserve for the entire amount of the accrued straight-line for the NECG lease during the fourth quarter.

I want to be very clear that this is entirely an accounting matter. It is non-cash and GAAP-driven. The reserve we are taking this quarter solely affects an accrual that built up because GAAP required up to recognize revenues on a straight-line basis rather than on an as-received basis.

In fact, as previously disclosed, we reserved against all the cash aspects this last June, and our action this quarter is entirely a non-cash, GAAP-driven exercise. To underscore the non-cash nature of this action, our most important metric, AFFO, never included the effects of the straight-line rent accrual, so this action this quarter has no effect on AFFO.

On our environmental remediation efforts, the headline for this quarter is that our overall environmental liability accrual remained basically constant from the prior quarter, at approximately $43.5 million. Our cost estimates increased by approximately $3.7 million, as the result of contamination discovered in the course of tank removals.

During the quarter, we also spent approximately $3.1 million, resulting effectively in an offset of the new amount accrued. From a growth perspective, externally, we are evaluating and pursuing a number of acquisition opportunities. The challenge for us is to remain disciplined, and to only execute on the best of these opportunities within our cost of capital constraints.

The current low interest rate climate negatively effects cap rates. I've heard it described as a yield famine, and we believe it is essential that we maintain pricing discipline in this environment, where we are making long-term investments.

With interest rates most likely to move up in coming years, it points to a more opportunistic investment stance than we have had in previous years. We are also increasing our focus on ways to drive growth through our own existing portfolio.

During the past few years, most of this activity has focused on dispositions to drive down costs and move out slower-growing assets. Today, we believe we have many opportunities to extract additional value from our existing portfolio. One focus will be exploring redevelopment opportunities for certain locations for higher and better usage to increase our returns on these properties.

We will also evaluate financing upgrades to existing properties, and/or simply harvesting high-value locations, like our 10th Avenue sale in Manhattan, to generate higher returns. By their nature, these are longer-term opportunities, but we believe, as part of creating value, we need to explore all options.

I also want to observe that we believe we are exceptionally well-positioned from a financial perspective. We had a balance sheet that affords as meaningful capacity and flexibility to support growth this year. At year end, our net debt was less than $135 million, which is the lowest level in more than three years, even after funding the $70 million acquisition we completed in 2013.

The ongoing transformation of Getty into a company that produces annual revenue growth is progressing well. We know there will be challenges we will continue to face, but we believe the combination of select acquisitions, the recycling of slower growth assets, and continuing to focus on measurably lowering operating costs, will result in improving our performance.

In summary, we are energized by both the organic and external growth opportunities we continue to pursue. We are in the later stages of our transformation activities, pleased with the successes -- sorry, I'm getting a little tongue-tied. And recognize that there are challenges ahead to finish the process. We are well-capitalized, have a low-leveraged balance sheet, and will continue to work it to enhance value for our shareholders in 2014 and beyond.

Finally, before I open up the questions, I want to formally welcome our new Chief Financial Officer, Chris Constant, to his expanded role. Chris has already been responsible for many of the things you see on this call, including our planning and borrowing relationships, and I am pleased to have him on board with his additional new responsibilities for financial reporting.

With that, operator, I'm very happy to open it up for questions. And I guess you have to come on and give everyone instructions on how to do that.

(Operator Instructions)

And we will go ahead and take our first question from Tony Paolone with JPMorgan

Thanks, good morning. Dave, what -- if you were to think about your portfolio, ex the marketing assets, the more arms-length assets that you have purchased over the years, where are cap rates for those type of properties today?

The opportunities that we are seeing right now, Tony, are in the sub-8% range for the high quality properties, For the highest quality, brand-new properties in fancy markets like Florida and California, you can even see sub-7% cap rates. And I think those are the ones in particular that we are not particularly interested right now in chasing. That's a 1031 market phenomenon as much as anything else, and not something that, from an institutional perspective, excites us very much.

Okay. Any -- at $20 a share for your stock price, you guys know your portfolio better than anybody. What do you think the implied cap rate is on those non-marketing assets right now, at $20 a share?

It's hard for me to speculate on that kind of question, because I haven't sat down and actually done numbers on that. But I think it's certainly above 7%. Whether -- it's between 7% and 9%, let me put it that way.

Okay. Just on G&A, what's G&A going to be in 2014? Just trying to understand, because it has bounced around a little bit. Like what the run rate is?

Tony, it's hard to say what -- with any precision, what that number is going to be. I think extrapolating from the fourth quarter is not a terrible place to start.

Okay, so it's closer to that $3 million to $4 million, as opposed to $5 million plus range where it seemed to be running before?

Yes, I wouldn't -- I would say it's probably closer to the $4 million range than it is to $3 million range, but it's certainly closer to that than it is to $5 million range

Okay. In disc ops, it seemed to be a negative number. Is that -- was there anything in there, as you unwind and sell those, that's just going to impact earnings? Is that really just going to be a negative FFO drag until those are gone?

I think you said it. It is just going to be a negative FFO drag until they're gone, redeveloped, or repositioned in some way. It isn't just disposals at this point. Some of those assets we think can be turned around, and some of them, to be fair, just need to be gone.

Okay. And what was cash out the door in the fourth quarter for environmental?

It was a little over $3 million, I think.

And any sense as to what that number looks like if we were to just ignore the accounting treatment of environmental-related costs and just think about cash over the next few quarters? Is that --

It's like in a good trend, where it is right now, subject to the observation that cash spent on environmental is very much a seasonal number. So I think you could see some variation in the warmer seasons, in the warmer quarters. And this is that -- we are reporting -- really reporting the fourth quarter, which itself starts as warm. So maybe you could call this an average quarter.

You could see it come -- I guess the point I'm trying to make is, in the first quarter, you could see it come down. Particularly this first quarter, because guys are not out digging holes in the ground in this particular winter. But I think that this is not a bad number to extrapolate from.

Okay. And any Cap Ex that was spent in the quarter?

Nothing meaningful, from our standpoint.

Okay, and then --

I want to be clear on that, Tony, that it does not mean that we didn't spend -- that no money was spent on our portfolio. I think that our tenants can point to any number of examples where our tenants spent a lot of money on the properties, but we didn't spend a whole lot.

Okay. And then just last question. No NECG, is -- so are they paying anything right now? Or have they just stopped payments?

Right now, they have been paying a modified amount on their rent for the last, say, since July. And that's continued. And that's the cash number that we've been reporting since July. It's been in our AFFO number since July. And given where that portfolio sits right now, we are pretty comfortable that there isn't very much downside for NECG in that number.

There could be some bumpy transitional things, but on the seasons basis, stabilized basis, we are comfortable with where that number is. Those are all decisions we made back in June when we took the cash reserves.

Okay, great, thanks

(Operator Instructions)

Juan Sanabria with Bank of America

Hi, good morning, guys. Just a quick question, from a guidance perspective. I know you put out something last year. What was the thought process as to why you chose not to go that route this year, given presumably you have a lot more clarity on the moving pieces?

I think, Juan, you answered your own question. The -- last year, if you recall, there was so much confusion coming out of 2012. And frankly, what 2013, we were pretty sure the first two quarters were going to look like, that we felt that some guidance was important to provide. And this company historically had never provided guidance.

And when we put the guidance out last year on this call, we said this is a one-time thing. We're not going to do it again. We're not establishing a policy of doing guidance. And that is our intention going forward.

Now it is something that we constantly review and consider. But like I said, I think you answered the question. Last year, there was so much confusion we felt that it was really important. This year, we think that there are certainly some issues, and certainly unresolved things that aren't nailed down, but it's a lot closer. And we don't think the urgency is there as much as it was.

Okay. From a balance sheet perspective, how much do think you can debt fund before you get to the top end of where you feel comfortable with leverage sitting? And can you just remind us of what that sort of ceiling, or where that comfort range lies?

We currently have roughly $150 million available to us under our existing line, no questions asked, draw on it right away. I think it's fair to say that we could feel comfortable to go north of that, and still feel comfortable. Because even with all of that drawn down, we are still very low leveraged, in our opinion. That would still leave us with a less than 40% debt to market cap.

But I think that, as we started to get 50% on a theoretical basis, then you see us start to maybe get a little uncomfortable. It also depends on what we are funding with it, and the nature of that. So you've got a -- there's a dynamism in that that it is hard to be very -- much more precise in the answer.

Okay, so you're thinking, I guess, 45% debt to market cap would be a ceiling? Is that --

I would say I'm starting to get nervous at 40%, and I wouldn't go over 50%.

Okay.

(multiple speakers) I don't want to put an absolute out there. I'm even more nervous at 50%.

Okay. And then, can you talk about a little bit about maybe opportunities to refinance some of the debt? I know you redid it around this time last year. But given you're on more solid footing, is that something you are working on? And how much margin compression could we see as a result?

I think there might be a little bit of spread compression in our pricing grid on the floating rate side of our debt right now. I think, though, that given the fact that we are pretty low leveraged, we are not sure that where we sit on the grid today, that there's a whole lot of opportunity.

If we were to move out and take more of our availability and have, as a pricing grid moves up, we think that maybe there's some pricing benefit to it. But I don't think there's an immediate benefit sitting there to be taken, based on where we are on our leverage grid right now.

And of course, the fixed rate piece, which we did now a year ago, sits at 6%. It's -- couldn't -- first of all, it is really not refinance-able, given the way it is. But if we were to go out and do fixed rate money today, could we do it at that price? Maybe, maybe not. The 10-year has moved up a full 125 to 150 basis points, depending on the day, since we did this. But I'm comfortable that that's a competitively priced piece of paper, within the margin.

Okay. And then just on the dispositions you guys have still left to do. It seems like there's a broader pool that you are looking at, relative to, should -- maybe more of a pruning of the portfolio versus disposing of more vacant properties. But going forward, how should we think of the dispositions? Are they -- are you actually losing NOI? Is there a ballpark cap rate we could think about? Or is it really just getting rid of properties where you're losing money, as to Tony's previous question?

I think it's, at this point, properties that are being disposed of, I think it's pretty easy to say with a blanket statement. The disposition of that property, even before the reinvestment of the proceeds that we realize, is a cash flow positive event

Okay. And just one quick follow-up. If I look at your AFFO calculation in your 8-K, the charge on impairments is bigger than what is flowing through the P&L. What's the difference? And where is that difference accounted for on the income statement?

I'm looking at Chris on this one

I think what you're referring to is the total impairment.

(multiple speakers) $5.7 million?

Correct, versus what's in the continuing operations. And the difference would be, impairment changes taken related to properties that are accounted for as discontinued

Okay. Thanks, guys

Thanks, Juan.

We will take a follow-up question from Tony Paolone with JPMorgan

Thanks. Just on Juan's balance sheet question, just had a follow-up on the equity side. Do you guys have the ability to put an ATM program in place?

Yes

Has that been something you've considered?

We consider everything all the time, but we have not put one in place. Obviously, if we did, it would be publicly announced. But to be eligible for an ATM, Tony, all you have to do is have a shelf in place, and we do.

Okay. And then just last question. Where's -- can you give us any sense as to where taxable income is trending? Just get an understanding as to what your dividend requirements are?

They don't perfectly track. I can say that for 2014, from what we see today, taxable income is going to be above AFFO or NOI, mostly driven by the dispositions that are going to occur. But whether that affects our distribution requirement is a different question. Because the -- in the abstract, it is really easy to think of the two of them as riding together, but they really don't. There's an awful lot of wiggle room.

And you can, for example, is that you can use distributions in subsequent years to cover under-distributions in a prior year, if that makes any sense. That creates a push going forward, but it is not rigid in a particular year, that you have to make all of the distributions required for the taxable income. Does that make any sense?

Yes. No, I understand some of the rules around carrying over and so forth, and the timing of those things. But if -- I'm just trying to understand. If you're mentioning that your AFFO in the fourth quarter was $0.24, and so let's just annualize it to about $1. And you're saying taxable might be north of that. It sounds like, if that trend were to occur over time, the $0.80 run rate in your dividend -- it sounds like it is actually not enough, putting the timing and nuances to the payments aside

No, you're right. Yes. But you also wouldn't necessarily want to move your overall dividend policy, again something that was being -- that resulted from more like one-time capital gains from dispositions of properties. We don't want to move our basic dividend in a way to cover something that is really a temporary event

Right, but your -- but the gains weren't in the AFFO number, right? In the fourth quarter?

That's correct. The gains are not in the AFFO number.

Okay. Great. Thank you

And that concludes the question-and-answer session today. Mr. Driscoll, I will turn it back over to you for any additional or closing remarks

My closing remarks are, thank you all for listening to the call, and your continued interest in our company. And we certainly look forward to talking to you. And hopefully the back of this winter has broken, and it's a lot warmer outside. Thank you

And that does conclude today's conference. We thank you for your participation.