Getty Realty Corp (GTY) 2014 Q2 法說會逐字稿

Good day, and welcome to the Getty Realty, Corp., second quarter 2014 earnings conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Joshua Dicker, Vice President, General Counsel, and Corporate Secretary. Please go ahead, sir.

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 ended June 30, 2014. Form 8K 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 and events and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

Examples of forward-looking statements may include those made by Mr. Driscoll regarding future company operations, future financial performance, and the Company's acquisition and redevelopment opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual results or events could differ materially.

I refer you to the Company's annual report on form 10K for the fiscal year ended December 31, 2013, as well as our 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 thank you, everybody, for joining us on our call this morning. Welcome to the call for the second quarter of 2014.

Our second-quarter results continue to reflect the steady progress we think we're making. While the quarter was relatively quiet, we are pleased that we continue to execute on the final pieces of our portfolio repositioning activity. To that end, we sold an additional 21 locations during the quarter and leased 13 locations, each long-term triple-net leases.

With few distractions, we produced stable operating results, and the improved results themselves illustrate the progress we're making.

We did produce significant year-over-year financial improvement, with AFFO per share increasing by 59%, after adjusting downward for the effect of one-time receipts generated by the successful legal action against Luke Oil, the former parent of GPMI.

However, our consistent quarter-to-quarter sequential results of $0.27 per share of AFFO, is more reflective of our overall investment objectives in the asset class we operate. This demonstrates the type of steady result we expect to achieve going forward.

While we diligently work to conclude our transitional activities and pursue growth by accretive acquisitions and other means, we believe that our results this quarter are approaching a good baseline for the performance of our current portfolio.

For the quarter ended June 30, 2014, our revenues increased by $0.7 million, $700,000, to $25 million. The primary drivers to this increase were the impact of a full quarter's revenues from the May 2013 CPG acquisition and the impact of the commencement of triple-net leases on the 13 properties I mentioned earlier on this call.

On the expense side, we continue to see reductions in rental property expenses and general overhead. We benefited from a $1 million reduction in our rental property expenses that was driven largely by the repositioning activities over the last year, but we continue to see declines in rent expense and maintenance.

We also purchased five properties that we had previously leased. The transactions that will result in roughly a 10% cash-on-cash return after everything is counted.

On the administrative overhead side, legal and professional fees declined by $1.1 million for the quarter, while employee-related costs and public company expenses were relatively constant.

As we move forward, we will continue to focus on gaining operating expense leverage as we conclude our repositioning and redeployment process. These expenses are in the nature of declined property taxes, maintenance cost, utility charges, and professional fees.

We may need to invest capital to successfully reposition a number of locations, and we will focus most of that investment on capturing measurable improvements that will also contribute measurably to our cash flow.

While we have made great progress, we still have challenges that we are working through, and we expect that in the coming quarters we will begin to harvest some of the work and the capital we have put in.

Turning to our environmental remediation efforts, the overall environmental liability declined in the quarter by approximately $700,000, to approximately $41.3 million. As usual, I want to underscore that environmental costs and accruals vary considerably from period to period and are hard to predict and should be evaluated based on long-term, multi-year trends rather than quarter-to-quarter.

As I mentioned earlier, we are working to improve on our steady performance by growing through accretive acquisitions. We are, by nature, a long-term investor focused on long-term returns. This is an unusually low interest rate environment, and in that environment competition for income-producing assets is quite heated. The result is that values are very high and returns at historical lows.

Our response to this competition is stay disciplined and focused on executing only on the best opportunities, while being mindful of our cost of capital and return thresholds. As a result, we cannot control the timing of acquisitions, but the flow of potential opportunities remains good and we remain confident that by being patient and disciplined in our approach, over time we will be able to grow our portfolio.

Another way we are seeking to generate growth is increasingly by focusing on internal growth opportunities inside our existing portfolio of more than 900 locations. During the past few years, most of our activity in the portfolio has focused on leasing and dispositions.

Moving forward, we expect to see more opportunities to redevelop and reposition properties for higher and better uses to increase our return on these properties.

Our low leverage position reflected in our conservative balance sheet positions us exceptionally well to execute on these growth opportunities from a financial perspective.

Quarter end, our net debt was approximately $125 million, which remains at its lowest level in more than three years, and our debt to EBITDA, stood at approximately three times. This permits us meaningful capacity and flexibility to support our growth initiatives.

We believe Getty is on the move and our progress continues. We have both internal and external growth opportunities, which should drive our financial performance over the long term. Of course, challenges will exist, but our team is adept at navigating and overcoming difficulties. We have positioned the company to succeed and improve our performance.

With our low leverage balance sheet, stable cash flow, and multiple growth opportunities, we're excited by the progress we've made, and even more eager to create value in the future for our shareholders in coming years.

That concludes my prepared remarks. So let me ask the operator to open the call for questions.

(Operator Instructions) Anthony Paolone with JP Morgan.

On property operating expenses, the $6 million that you had in the quarter, how much of that is discretionary, I guess, or controllable, if you will, because you talked about just doing things to reduce that. I just want to understand what part of that is really just reimbursed up in revenue and washed out and what part of it can you really have some control over.

I'm going to ask Chris Constant, our CFO, to comment on that one for you, Tony.

Sure. The lion's share of that number is up in revenue and it's reimbursable. The controllable expenses are part of the repositioning, which is really expected reductions in maintenance, rent, and unreimbursed real estate taxes as we conclude sort of the leasing activities and disposition activities that Dave had referenced.

So, and I guess another way of trying to look at it is if you just take the $25 million in revenue against $6 million of OpEx in the quarter, you have $19 million of effectively net rents. I guess, like does that -- should that number be higher if some of these other, these controllable expenses kind of go away or you stop making certain investments? Or is that the run rate? I'm just trying to understand like what you can do versus what just will be the case going forward.

I'm not sure I follow the question.

Like is $19 million a good run rate or are there things and expenses that can still go away?

I think there are elements to our rental property expenses that will continue to fall off in the fourth quarter.

Yes, I think we all believe that the rental property expenses will continue to decline in the coming quarters, I think is the best way to put it, Tony. But I don't think that they're going to disappear completely. That number's not going to go to zero because there's a lot of pass-through expenses in there.

Right. So do you know what the amount of non-pass-through expenses are out of the $6 million?

Yes. It was roughly $2.5 million for the quarter.

Okay. Got you. The acquisition pipeline you guys talked about, you said there's a lot of flow. Can you put some brackets around just the size of that? And I know you did a few million bucks in the quarter and some after the quarter. But is it something where we can see that go to $20 million, $30 million a quarter of deals that you do or is this kind of a [hit rate] that's --?

We're certainly seeing new opportunity, Tony, at the rate of, [maybe] put some brackets around it, $20 million, $30 million a month. That doesn't mean it's stuff that we want to do or really, more particularly at this point, stuff that we want to do with the price that it's being offered at.

So we're looking at stuff. We're seeing stuff we want to buy. We're making offers on that stuff. But I guess the best way to describe it is the market is not clearing.

I'll make a further comment that from what I can see, and you don't have perfect visibility on this, that doesn't mean that the stuff is trading away from us, so much as it is that the sellers are just continuing to say, well, boy, I got 2% bank debt, I'm just going to sit on this for a while and a transaction isn't going to happen.

So it doesn't even mean -- I guess the point I'm trying to make is, it doesn't mean it's going way, it's just that there's not a lot of compulsion for sellers right now, and the values of the return, that essentially you can see them as expressing opposite ends of the same spectrum, are just not attractive and the market isn't clearing in a lot of cases.

And what kind of yield are you kind of seeking out? Is it nines or sevens? Like what's the sweet spot in the stuff that you would like to buy?

We have stuff in the portfolio that we're interested in buying that ranges from modestly below seven for high-quality, good location, great tenant, great credit tenant, to more speculative stuff in the high eights, which we'll have one or two of those aspects, but maybe not all of them.

Okay. And are you looking outside of gas stations or are you sticking with a product that's similar to what you currently own?

Right now we're looking inside of gas stations. Now, I will say, that once something is in our portfolio, and I'm trying to telegraph this in the prepared remarks, we're spending a great deal more time looking at ways to convert some of our existing owned gas stations into other things and I think starting to get some very good traction in that.

So we could see conversions inside the owned portfolio. But right now, the acquisition portfolio, we're sticking to what we know best.

Okay. Great. Thank you.

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

Great. Well, I want to thank everybody for joining the call, and we look forward to seeing you again in three months as we continue to move forward and create value for the shareholders. Have a great day, everybody.

That concludes today's conference. We thank you for your participation.