Getty Realty Corp (GTY) 2017 Q1 法說會逐字稿

Good day, and welcome to the Getty Realty Corp. First Quarter 2017 Earnings Conference. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Joshua Dicker, EVP, 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 First Quarter Conference Call. Yesterday afternoon, the company released its financial results for the quarter ended March 31, 2017. Our 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 2017 guidance and may also include statements made by management in their remarks and in response to questions, including regarding future company operations, future financial performance and the company's acquisition or redevelopment plans and 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 year ended December 31, 2016, as well as 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 revised definition of AFFO and our reconciliation of those measures to net earnings.

With that, let me turn the call over to Christopher Constant, our Chief Executive Officer.

Thank you, Josh. Good morning, everyone, and welcome to our call for the first quarter of 2017. With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Danion Fielding, our Chief Financial Officer.

I'll begin today's call by providing an overview of our first quarter 2017 performance and business prospects, and then I'll pass the call to Mark to discuss our portfolio in more detail, and then Danion will discuss our financial results.

We produced another steady quarter, which displayed both modest growth over the prior year's quarter and the continued stability of our portfolio of net leased convenience store and gas station assets. At the same time, we made progress on our strategic goal of growing and enhancing our portfolio through disciplined acquisitions and redevelopment projects.

Turning to our results. We reported increases in net earnings, FFO and AFFO for the quarter. Our reported quarterly AFFO per share was $0.41, which represents an increase of 2.6% over the prior year's quarter after adjusting for certain nonrecurring notable items, which Danion will discuss. Excluding notable items, our normalized AFFO was $0.40 per share for the quarter ended March 2017, up from $0.39 per share for the quarter ended March 2016.

Moving to our portfolio. We had a good start to the year in 2017. As Mark will discuss in more detail, we acquired 5 high-quality, well-located properties for $6.2 million during the quarter and have a pipeline of opportunities, which includes both single-unit and portfolio acquisition opportunities. The assets acquired and those in our pipeline are located in geographic regions, which both overlap with our existing sites, where we would like to increase our presence and in new markets that we find attractive, such as the Southeast and Southwestern regions of the United States.

We also disposed of 6 sites during the quarter, which were no longer core to our business. And moving to our redevelopment program, we executed 2 leases during the quarter, which brings our total number of redevelopment projects to 15. We also took several steps during the quarter to improve the strength and flexibility of our balance sheet, including continuing to selectively utilize our ATM program, terming out $50 million of floating-rate borrowings to long-term fixed-rate debt and continuing to reduce our environmental liability. Through years of hard work, we have stabilized the earnings potential of our core portfolio. And as we look ahead, we can now focus on growth. Our balance sheet is in excellent shape, and we are actively seeking to leverage our net leased platform by growing the portfolio both in terms of adding new assets and redeveloping existing sites to higher and better uses.

As we move forward, we will look to build upon our stable growth and continue to enhance the quality of our net leased portfolio. We remain excited about our business prospects and are focused on executing on our stated growth strategies, which we believe will drive additional shareholder value as we move through 2017 and beyond.

With that, I will turn the call over to Mark Olear to discuss our portfolio and investment activities.

Thank you, Chris. I will start by reviewing our investments for the quarter.

During the quarter, we purchased 5 properties located in New York, Connecticut, Arizona and Ohio, for a total purchase price of approximately $6.2 million. These acquisitions included the purchase of previously leased properties and subsequent transaction with existing tenants and the purchase of triple net leased properties, which meet our underwriting standards for real estate attributes, pending credit and operational quality.

In total, these acquisitions were purchased for a rent-weighted average cash return of 7.7% and had a rent-weighted average remaining initial term -- lease term of 8.4 years. While the acquisition market continues to be very competitive in the convenience and gas sector, we remain disciplined in our underwriting criteria. Our pipeline of actual opportunities continues to grow, and we are in the process of reviewing and pursuing several additional acquisition opportunities.

In terms of capital recycling, during the quarter, we sold 6 properties for $1.4 million in the aggregate.

Moving to our redevelopment platform. We ended the quarter with 15 signed leases and letters of intent, which includes 7 active projects and 8 properties which are currently included in our net leased portfolio. All of these projects are continuing to advance through the development process. We expect substantially all of these projects will be complete over the next 2 years. In total, we have invested approximately $1.8 million in redevelopment projects to date, and we expect to have rent commencements at several projects in late 2017 and 2018.

On the capital spending side, we estimate that these 15 projects will require investment by Getty of $11.2 million to complete and will generate incremental returns to the company in excess of where we could invest these funds in the acquisition market today. For more detailed information on the redevelopment pipeline, please refer to Page 16 of our investor presentation, which can be found on our website. We remain committed to transforming certain sites in our portfolio and look forward to updating everyone as we make progress.

Turning to leasing. We either entered into new triple net leases or added sites to existing unitary leases on 5 gas-keeping store properties during the quarter. On an incremental basis, these transactions are expected to add $170,000 of annual rent income to our results going forward. As a result of our activity, we ended the quarter with 806 net leased properties, 7 active redevelopment sites and 10 vacant properties. Our weighted average lease term is approximately 11 years; and our overall occupancy, excluding our 7 active redevelopments, increased by 60 basis points to 98.8% as compared to 98.2% at the end of last year.

With that, I turn the call over to Danion.

Thank you, Mark. Now turning to our financial results. For the first quarter, our total revenue from continuing operations and revenues from rental properties, which excludes tenant expense reimbursement and interest income, were $27.6 million and $24.3 million, respectively. Cash rent received from our tenants increased quarter-over-quarter. However, the reported figures declined largely due to lower interest income and noncash revenue recognition adjustments.

During the first quarter of 2017, our results were positively impacted by reductions in all of our major expense categories, including property cost and G&A expenses, which both declined by $0.6 million quarter-over-quarter. The decline in property cost for the quarter was driven by decreases in real estate taxes and tenant reimbursements, and the decline in G&A was primarily attributable to decreases in legal fees and nonrecurring employee costs.

Our reported FFO for the quarter was $18.2 million or $0.52 per share, including a $0.01 net benefit from notable items, which we will highlight as they are not part of our core operations. For more information on notable items, please refer to last night's earnings release. After removing these notable items, our normalized FFO per share for the quarter increased by 21% to $0.51 per share this quarter from $0.42 per share in the prior year's quarter. Our reported AFFO for the quarter was $14.5 million or $0.41 per share. After removing notable items, our normalized AFFO per share for the quarter increased by 2.6% over the prior year's quarter.

Turning to the balance sheet and our capital markets activity. We ended the quarter with $300 million of borrowings, which includes $75 million of undrawn credit agreement and $225 million of long-term fixed-rate debt. Our weighted average borrowing cost is 5%, and the weighted average maturity of our debt is 4.8 years with 75% of our debt being fixed rate. Our debt to total capitalization currently stands at approximately 25%, and our net debt to EBITDA is 3.4x.

In addition, we used our ATM program during the quarter and issued $4.4 million of equity at an average price of $25.84 per share. Our environmental liability ended the quarter at $68.8 million, down $5.7 million so far this year. For the quarter, the company's environmental remediation spending was approximately $4 million.

Finally, we are reaffirming our 2017 AFFO per share guidance of $1.54 to $1.60 per share. Our guidance does not assume any additional acquisitional capital market activities, although it does reflect our expectation that we will continue to execute on our redevelopment, leasing and disposition activities.

With that, I will turn the call back to Chris.

Okay. Thank you. We're happy to take any questions.

(Operator Instructions) We'll take our first question from Gene Nusinzon with JPMorgan.

Question for Mark Olear on investments. What is the pipeline of single-unit portfolio acquisitions currently look like?

We continue to see a large amount of opportunity in the single net -- triple net -- I'm sorry, triple net single-asset opportunities. We think it's a very actionable pipeline, and I think we'll continue at our current pace to pursue those and acquire properties that meet our real estate and credit and operational quality.

Okay. And can you quantify just how many deals you look at in a given quarter? And how many get bids realized?

Well, we see pretty much everything that's on the market, we feel, so as far as what come across our desk, it could be dozens or hundreds in any given month. We prequalify those. We screen those, and then we go into our full due diligence and underwriting. And this month, we did 2 or 3 -- this quarter, I should say, we did 2 or 3. And I think that's kind of where our pace is.

Okay. And then on guidance. Are any of the acquisitions that may be in the pipe later this year, are those baked into the AFFO guide you provided?

No. No additional acquisitions are in our AFFO guidance right now. To the extent there are meaningful acquisitions completed, obviously, we would consider that as part of a future update on our guidance, but there's nothing in there right now.

Okay. Final question. We’ve seen some of the retail-backed net lease restock selloff recently. I'm just wondering if you're seeing any similar kind of valuation cracks in the private market for C stores and gas stations.

I think -- well, I'll say that I think the C store sector is an interesting place in the retail environment. You have a product, which is gas, that drives the consumer there. People are still continuing to drive. And as far as I know, there is -- there's no e-commerce solution to gasoline at this point. I think the trends toward convenience are still holding strong. I think more and more consumers are moving towards the convenience models. So I'm not sure we have some of the same issues that other retailers or other retail tenants may have. But certainly, tenant credit quality is certainly something that we focus on as part of our asset management group.

Okay. So no spillover from -- just overall deceleration of values of other retail?

I think it hasn't gotten to that point yet.

But you do anticipate that would actually be the case?

I'm not sure that we would see the same thing. I think the trend that we see is there are -- I think there's about 160,000 stations in the U.S. at this point in time. I think the number of stations is projected to probably decline over time, and it's -- part of our underwriting is to evaluate the real estate and quality of the operation. So you want to be part of buying sites that are, what I'd call, long-term keepers or where there's a real estate value such that if it's not going to be a gas station, it's going to be repurposed to a higher and better use.

Our next question will come from Peter Lunenburg with JMP Securities.

Just a follow-up on that. Are you guys seeing any credit issues, specifically to any of your tenants today? And then are you doing anything different with regards to kind of analyzing that tenant health?

Well, I'll take the second part of that question first, which is we certainly have the right to and get tenant level and site-level operating performance as part of our leases, and we have a process in place to evaluate that and monitor. Our real estate group is in frequent contact with our significant tenants, many of whom have leases that have upwards of 50 to 100 properties in them. So there's lots of dialogue relating to the sites. The large MLPs have gone through, in many cases, their financial restructurings. And in certain instances, the C store aspect of their business has been what's carried them through. So the wholesale distribution part of their business would have really struggled. The C store piece provided the profitability to bring them through their restructuring process.

Great. And then just back to acquisitions. Are you guys seeing any change in the buyer composition today? And then what would say pricing looks like compared to, say, year-ago levels? That's it.

I think the same universal buyers are still there. You have some of the, what I'd call, the large strategics, who have an -- own real estate strategy. You have the MLPs that are still somewhat active and other REITs that are also active. In terms of pricing, I think pricing has certainly become slightly less aggressive than maybe it was, say, 18 to 24 months ago. But it's still very competitive, and there's still a number of different types of buyers who are bidding on significant transactions.

(Operator Instructions) And it does appear there are no further questions at this time. I'd like to turn the conference back over to Mr. Chris Constant for any additional or closing remarks.

Thank you. Thank you, everyone, for your interest in Getty. We look forward to speaking to everyone at the end of the second quarter, and we appreciate your interest in the company.

This concludes today's call. Thank you for your participation. You may now disconnect.