Getty Realty Corp (GTY) 2014 Q4 法說會逐字稿

Good day, everyone and welcome to the Getty Realty Corporation fourth-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 and year ended December 31, 2014.

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 our 2015 guidance, and may also include statements made by Mr. Driscoll in his remarks and in response to questions, including regarding future Company operations, future 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, 2013, and our soon to be filed annual report on 10-K for the year ended December 31, 2014, as well as our quarterly reports on Form 10-Q and our other filings with the SEC for a more detailed discussion of the risks and other 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.

Also please refer to our earnings release for a discussion of our use of non-GAAP financial measures, including our revision to AFFO and our reconciliation of those measures to net earnings. 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 and the year end of 2014. The quarter and the year reflect the steady progress on the objectives we set two years ago to lease or sell our transitional properties.

The progress that's most notable in 2014 is reduction in property operating expenses. In addition our professional fees and other operating costs associated with the marketing bankruptcy declined significantly as we moved past that process. And all of these factors drove our AFFO increase.

As we reflect on 2014, it was a year marked not only by additional progress against our initiatives, but also one that really showed positive impact on our results. This is best reflected in our AFFO per share for 2014 of $1.26, which is almost double our 2013 AFFO excluding the payments that we received in 2013 from the GPMI bankruptcy estate and the Lukoil settlement, and our Q4 AFFO of $0.34 a share.

These results also supported the dividend increase of 10% to $0.88 per share annualized and a special dividend of $0.14 per share at the end of the year. Most of this improvement was due to aggressive reductions in property operating expenses and general and administration and other costs.

Transition work continues in 2015 and while we continue to expect improvement in our results from this process, the velocity of those improvements will begin to slow. With respect to our environmental remediation efforts, we spent $4.1 million this quarter and approximately $13.5 million for the entire year of 2014.

Our activities in these amounts are in line with prior periods and about what we expect for 2015. We have been removing or replacing a significant number of underground storage tanks at sites previously leased to marketing, and we anticipate this trend will continue over the next decade.

The Company is now able to develop a reasonable estimate of the prospective future environmental liability resulting from pre-existing unknown environmental contamination at former master lease sites leased to marketing. Based on these estimates of December 31, 2014, the Company accrued $49.7 million of future environmental liabilities related to the pre-existing unknown contamination.

This increases our non-cash environmental liability by $49.7 million, bringing our total environmental liability now to $91.6 million on our balance sheet. This number represents the estimate of the amount we will spend over the next 10 years on these future environmental cleanups.

It is a non-cash outlay today and does not directly impact our earnings, AFFO, or FFO. It is an estimate, and as we spend it to reduce our remediation liabilities in the future, our environmental liability on the balance sheet will be reduced by the amount we spend.

In many ways this can be viewed in the same way as principal repayments on borrowings which also reduce liabilities as they are made. Principal payments are not a reduction to income, but they do reduce liabilities and as they are made thereby increase equity value.

Even as we saw material improvements in our operating results during 2014, 2014 was deliberately a slow year from an acquisitions perspective. A number of factors contributed to our remaining discipline, ranging from continued demand by individual investors in the 1031 market which increased values of properties and decreased return levels to levels that did not make sense to Getty from a return perspective.

We also saw increased activity from large, well-capitalized private and public REITs and the emergence of well-capitalized MLPs in our target marketplace who have many of the same, single-level tax advantages that we have. Some of this competitive pressure eased late in the year, and we have seen a resulting increase in our prospective acquisitions pipeline, and we hope that will yield positive results early in 2015.

In addition internal growth activities towards higher and better uses remain an area of focus for us. A few of these activities individually will materially improve results, but in the aggregate over time we anticipate these activities will provide a steady tailwind both in terms of improved returns and improved underlying credit quality in our portfolio.

All of these activities can be supported by our conservatively leveraged balance sheet. Our balance sheet affords us meaningful capacity and flexibility to support our growth initiatives.

At year end, our net debt was less than $120 million, which is the lowest it has been a more than three years. We have a net debt-to-EBITDA ratio of approximately 2.3%, or 2.3 times.

Let me now provide our initial expectations regarding our outlook for 2015, which we also provided in our earnings release. We have established our 2015 AFFO guidance at a range of $1.20 to $1.25 per diluted share.

Our guidance does not assume any potential future acquisitions or capital markets activities. The guidance is based on current plans and assumptions and subject to risks and uncertainties more fully described in the press release and the Company's reports filed with the Securities and Exchange Commission.

Our outlook does not assume potential future acquisitions and dispositions which could result in a material change to the outlook. The Company's outlook is also based on a number of other assumptions, many of which are outside the Company's control and which are subject to change.

In summary we remain energized by both the organic and external growth opportunities we continue to pursue. We are well-capitalized, have significant financial flexibility, and we'll continue to work to enhance value for our shareholders in 2015 and beyond. I think now we can open it up for questions if anybody has any questions.

(Operator Instructions)

Anthony Paolone, JPMorgan.

Thanks, good morning.

Good morning.

Your bad debts seemed like they moved up in the quarter, and I was wondering if you can address why that was and also the impact of falling oil prices on the business, and your underlying tenet credit. Was there tie in there?

The bad debt expense, Tony, was up I think largely because of one tenant in the portfolio that has property from the former GPMI stake that we are working through some issues with. It's not a huge number, so we're not particularly concerned about it at this point.

We think we're going to work through to a solution where that portfolio is transitioned to a better place, let me put it that way. With respect to falling oil prices, I think that's actually quite a positive overall for our industry and its tenants at the retail side of the business. And there's really three underlying factors which drive that.

And I think the first one most people recognize is that margins tend to widen when prices fall. Much of that was felt in 2014.

So this is the case where as prices fall, as there is oversupply at the refinery, as prices fall at the refinery faster than they do in the street which causes retail margins to widen, and our guys just simply make more money for every gallon of gas that they sell. That is a short-term effect, and they come back into line and as the year concluded that could be more normalized.

However, prices have now fallen to almost half of where they are and that causes the second effect to go in which is just simply increased volume. The lower the price of gas the more gas people are going to use, and that has a knock on effect of not only having more gallons sold but it's also more visits to the location which causes more in-store visits and the profit is inside the store.

So this also helps to enhance the profitability of our tenants and therefore improving the credit quality of our portfolio. Finally the third effect which most people don't immediately see but they go aha when you point it out to them is the effect of credit card bills.

So generally speaking the credit card guys take around 4% of the cost of the price of the transaction. So at $4 a gallon the credit card company is taking $0.16 per gallon.

At $3 a gallon, and its below $3 a gallon, the credit card company has only taken $0.12 of the margin and that leaves $0.04 for our retailer in the middle. That's a very significant number because generally speaking our guys are working on margins that are in the $0.15 to $0.20 range anyway.

So $0.04 is a huge bump to what their typical margin is. That effect alone has caused increased profitability to our tenants, but its quite noticeable to us as we evaluate their operating performance.

Okay, got it. Thank you that's helpful. And on the oil price front just one real quick follow-up though on the bad debt side. So the allowance for doubtful accounts in the quarter I think was $1.1 million roughly?

That was a straight-line rent write off. It wasn't so much cash as it was a straight-line rent write off of some -- that basically had already been smoothed out of the AFFO.

Okay. So would that -- like for FFO purposes that $1.1 million, what does that normalize on a go forward basis?

I've got to turn to Chris for that one.

If you took the straight line right off that.

The allowance account consists of both reserves for doubtful accounts as well as allowances for straight-line rent. In the quarter we had an allowance for straight-line rent of about $728,000. So I think if you back that out to that sort of one-time nature, that's where we think we will wind up from a recurring allowance standpoint

Got it, okay. Thanks. And on the environmental, so what actually prompted the additional accrual?

Was there a test that came back or is this just part of a normal review process? Why now I guess? What happened?

There wasn't any smoking gun. There wasn't any particular discovery while somebody was digging in the ground.

We just reached a point where we believed we could estimate what this future remediation could cost, and when you reach that point that requires in fact that you make an estimate and disclose the estimate on your balance sheet. So what we're doing is we're following GAAP.

We got to a point where we believed we could make an estimate. I think that one of the benefits of it is that I think it does permit us to improve the transparency of the disclosure, which is what I was trying to get to in the prepared remarks in talking about the fact that now when we spend $1 of environmental remediation you really are going to see a significant if not all of that then reduce the environmental liability on the balance sheet.

You can remember previously that we'd spend $1 on environmental remediation, but the balance sheet liability wouldn't necessarily go down because we were discovering additional liability as we get it. And so as we got more used to this portfolio and understood it better, we get into a position where we felt comfortable that we could make a reasonable estimate, and having done that I think this going forward is going to make for a much simpler way to understand what's going on in that part of our world.

So do you think you can uncover more liabilities or you think this is it then, you've kind of reach that point where you have enough information to say this is the whole thing?

You're talking about are really inexact science. We think we have done as fair a job as anybody could in estimating essentially unknown liabilities at this point.

We're basically trying to make an estimate on what it's going to cost us to remediate liability on a piece of ground that nobody has dug the dirt up in and we expect they might sometime in the next five years. It's a very tricky process, but I can't tell you that we're not going to have additional increases in that liability.

I can't tell you we're going to have additional decreases in that liability. I can tell you that sitting here today this is our best estimate of what we think it's going to be.

Okay. And then just last thing on that -- you mentioned in your comments 10, GAAP -- you mentioned 10 years and the GAAP analysis to get to that number.

Is that a cutoff point just for GAAP purposes? Could this liability go on beyond 10 years and actually from an economic point of view be bigger?

There's a bunch of things that affect the 10 years. The three most important that come to mind is generally speaking these projections industry-wide are 10 years.

That's generally driven by the fact that as a general rule you're out 1.5 to 2 standard deviations in terms of what the time to closure is when you get to 10 years. So 95 or whatever the standard deviation curve is, 97.5% of these things take less than 10 years to remediate.

The third thing is that we do have something going for us here which is that first all of this liability, as you will recall, resides in our legacy portfolio which was leased to marketing and came back to us. And certainly for the portion of those properties that we re-let to long-term tenants, all of those leases essentially passed the unknown liability to those tenants on the 10th year anniversary of the new leases that we signed now 2.5 years ago.

Okay. Right. I understand.

I won't tell you that 11 years from now there won't be any environmental remediation going on, but it will be -- it should be the tail end of it. That's what the experts tell us.

Okay. And then in your 2015 guidance, what as it relates to environmental either accruals or actual cash or whatever, what's actually in AFFO in your guidance for 2015?

Chris do you want to go through that?

Sure. Our AFFO guidance is based on our current definition of AFFO, which we actually revised this quarter. It's FFO less revenue recognition adjustments.

The revision to the definition is to back out some of the non-cash pieces of environmental which flow through our GAAP P& L. So we backed out accretion expense and we've also backed out changes in environmental estimates.

And then acquisition costs and other recurring items. We do not deduct environmental spending from our definition of AFFO.

So make sure I get this right, you don't have any cash spending related to environmental hitting your AFFO?

Other than our normal GAAP environmental expenses which are cash which represent legal fees litigation and professional fees.

Okay. So the capital and costs related to driving down that liability though are excluded?

They are not in AFFO, but you're now going to see them basically apply toward the reduction of the approximately $91.6 million environmental liability. And you're going to see that go down pretty much dollar for dollar going forward.

Okay. And so then when you mentioned in the fourth quarter I think $4.1 million of cash environmental costs, was that kind of a dollar amount related to for instance driving down that liability? Or did that also include the cash amount paid for legal and things like that?

No, think of that as the former. That's the amount driving down the balance sheet liability. Think of that as the principal repayment.

Okay. Now I think I kind of understand this. So in 2015 how much do you think you'll spend to drive down the liability on a cash basis, and how much do you think you'll spend in cash on sort of the things that get expensed, like the legal and consultants and so forth?

Well, I said in the prepared remarks I think that the rate we're at in 2015, $13.5 million plus or minus, they go up a little bit because there's more tanks being removed. And one of the things that's occurring which gets a layer down below is that we can view a lot of these -- when you are doing tank removals you can also do a lot of environmental remediation at the time of the removal.

It's different from discovering contamination at a time when you are not removing the tank. Right? So when you're -- and it's frankly as simple as when you are removing the tank you can dig away all the contaminated soil and remove it and take it away.

Whereas if you're doing a well and you discover contamination you're not necessarily going to remove the tank, and so it's actually harder and can be more expensive to remediate. And it will -- your remediation dollars will be spread over a longer period of time.

So because all -- for all those reasons we might go up a little bit from the $13.5 million, but I don't expect it to go up a lot. What I think of is the administration expenses around environmental in 2015 -- Chris is trying to show me a number.

The 2015 numbers that are part of our guidance for the administration expenses are roughly $3 million

And that was in 2014 and as we said the 40 deducted from the 2015 guidance.

Right. The $3 million is like the cash expense that's basically -- you keep in the AFFO?

Right. I think of that as the -- I think of it as the administration expense versus the digging expense.

Sorry, I'm going to take that back and say it's $3.5 million left off this.

Okay. Got it. Do you guys have much in the way of remaining CapEx commitments to tenants? I think you guys did some of those when you were releasing marketing assets

We made some TI promises. Those are ongoing. They will be ongoing I think for another four or five years.

I will tell you that I know how you look at them. We look at them a little differently.

We don't think of them as the same thing as the TI commitment for say a guy in the rental apartment business, because it's not something that's going to recur every three to five years, replacing carpets, painting walls, and things like that. These are really more of what we think of as one-time items that occurred as a result of the fact that we were re-letting the portfolio on a 30 year basis rather than a two to three year basis.

But yes, we still have some of that in front of us. My guess is we probably spent somewhere a little under one-third and we have two-thirds or so to go.

And what that roughly maybe annually in dollars if you spread it out over the three to five years?

Tony, the total amount on our books today from those commitments is roughly $14.2 million. The total commitment gross was $15.3 million. We spent $1.1 million over the first two years of the leases.

More to come

Okay. And then last topic, can you just maybe give a little bit more detail on your deal pipeline in terms of cap rates? Do you think you would transact that and kind of magnitude? Is it tens of millions of dollars, $100 million we could expect as the next --?

We're looking at transactions that range from lots of little ones at $2 million to $3 million to several portfolios that are $100 million or above. We expect -- cap rates really are going to depend on what part of the country, where the properties are, and of course how strong and robust those properties are.

I think you could see us below $7 million in some cases, and I could see us above $7 million in other cases. It's hard to generalize because each portfolio has a different and unique set of credit and real estate qualities that impact it.

Okay. It sounds like plus or minus $7 million is the --

Plus or minus $7 million, yes.

That's all I got. Thank you.

Thank you.

(Operator Instructions)

Tim Hasara, KCM.

Yes, I'm just curious on your shelf registration if you can give us any additional color on what options you might take here?

Well the shelf itself we saw is really nothing more than a renewal of the shelf that we filed 3 plus years ago. And shelves essentially goes stale and you have to basically re-up them every three years.

I don't think there was anything particularly special about that shelf filing that you saw other than just a check the box renewal. Now my SEC people around the table are grimacing at me, but to me it was simply a renewal.

The shelf itself is what they call a universal shelf which provides us the ability to issue almost any kind of security that we want out of it. Again, I think that's pretty common and standard.

Certainly our expectation, I won't tell you I'm saying this with any certainty, but in the past really the only things that -- public securities that we've done off our shelf have been common equity. And I don't at this point I don't see us doing anything a heck of a lot more esoteric than that. We'll look at our options if and when we need funding and we'll take advantage of what we think is the best way to handle our balance sheet.

I mean on the equity side then if in fact you found an acquisition or some opportunity, you are comfortable selling equity here or lower?

Again, it all depends on so many depending things about what the transaction is that we're looking at, what it's return rates are, what interest rate expectations are at that time. So I'm not going to make any particular comments about where we feel comfortable selling equity and where we don't other than to say that we're constantly reevaluating what the best way to manage the balance sheet is, particularly in the context of acquisitions. And we certainly look to have things be accretive in the long term.

And what is the long term that you're defining?

Well for purposes of that I would expect it would be actually fairly short, two to three years.

And your reserve for the environmental, does that affect your dividend policy at all going forward?

It's all non-cash so the answer is no.

But there's an anticipation of a cash spend though, right? The reserve is non-cash but --

You're right, there is an anticipation of a cash spend and we take that -- it's there now. It hasn't changed as the result of this liability being accrued. It's there now and so we've already taken into account in previous periods with all of the dividend declarations we've made and will continue to do so.

Okay, fair enough. Thank you.

And with no more questions I'd like to turn the call back over to David Driscoll for any additional or closing remarks

My only additional or closing remarks would be thank you all of you who are on the East Coast of the United States for joining the call today. I hope you had the good common sense to be taking the call from your homes or you cell phones because while we are in the office the weather is absolutely frightful. And I understand it's going to be like that all day. Thank you and I look forward to talking to you when it's warmer and sunnier and greener.

Thank you. That does conclude today's conference. Thank you for your participation.