Getty Realty Corp (GTY) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to Getty Realty's earnings conference call for the first quarter of 2018. This call is being recorded.

Prior to starting the call, Joshua Dicker, our Executive Vice President, General Counsel and Secretary of the company, will read a safe harbor statement and provide information about our non-GAAP financial measures. Please go ahead, Mr. Dicker.

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, 2018. 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 2018 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, 2017, 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 an 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, which was revised at the end of 2017, and our reconciliation of those measures and 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 2018.

With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Danion Fielding, our Chief Financial Officer. Let me begin today's call by providing an overview of our first quarter 2018 performance and growth initiatives, and then I'll pass the call to Mark to discuss our portfolio in more detail, and then Daniel will discuss our financial results.

We began 2018 with a solid quarter, which reflected both the steady performance of our core net lease portfolio and the additional income we generated from our 2017 acquisition activity. For the first quarter, we reported net income of $10 million, FFO of $17.8 million and AFFO of $16.8 million, which grew by $2.6 million or more than 18% over the prior year's quarter. Our quarterly AFFO per share of $0.42 increased by $0.02 per share or 5% over the prior year's quarter.

Moving to our portfolio. We remained active in evaluating potential acquisition opportunities, pursuing redevelopment projects and selectively recycling capital. During the first quarter, we sold 4 noncore properties, and we continue to invest in several redevelopment projects. Subsequent to quarter end, we acquired a portfolio of 30 properties and a $52 million acquisition leaseback transaction with GPM Investments. This transaction further enhance the company's presence in the Southern United States. And we continue to pursue additional attractive opportunities, which would further strength and diversify our portfolio.

We remain diligent in our underwriting standards. As such, we continue to be focused on acquiring high-quality real estate and partnering with tenants who share our commitment to the growth and evolution of the convenience and gas sector, as we believe these are critical components to driving additional shareholder value as we move through 2018 and beyond.

During the quarter, we also completed several important steps to fortify our balance sheet. First, we refreshed our $125 million ATM program. Secondly, we completed an upsize refinance of our existing credit facility, which pushed out our near-term debt maturities and significantly improved the terms and pricing of our borrowings. And finally, in the second quarter, we received the company's first-ever investment-grade debt rating from Fitch.

I'm particularly pleased by the company's new debt rating as it reflects years of hard work by our staff and management team in terms of the refinement and successful repositioning of our portfolio. Added to this effort was strong leasing and disposition activity over the last 5 years. Our approach has enabled us to maintain a low leverage and flexible unsecured balance sheet and in turn, support our proven ability to accretively grow and diversify our portfolio.

As we look ahead, we believe that the stability of cash flow from our core net lease portfolio and our conservative balance sheet will continue to afford us with the opportunity to focus our efforts on growing our business at a lower cost of capital. We remain focused on our three-pronged growth platform consisting of a combination of stable growth, supported by asset management activities in our core net lease portfolio; expanding our portfolio through acquisitions in the convenience, gas and auto related sectors; and selective redevelopment projects. We remain confident that we'll be able to continue to successfully execute on our strategic objectives throughout the remainder of 2018.

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

Thank you, Chris. I will start by reviewing our first quarter activity and then will turn to our portfolio acquisition, which closed after quarter end.

During the quarter, we disposed a 4 noncore locations for $1.4 million of proceeds. In terms of redevelopment projects added for the quarter, we executed 2 new leases with tenants, who will operate 1 property as a new-to-industry convenience and gas use and other property as a automotive parts store. This brings our total redevelopment projects with signed leases and LOIs to 16, which includes 10 active projects and 6 additional projects on properties, which are currently included in our net lease portfolio, all these projects to continue to advance through the redevelopment process. We expect substantially all these projects will be completed over the next 1 to 3 years, with several projects moving to rent commencement 2018.

In total, we have invested approximately $1.5 million in these redevelopment projects, with $300,000 occurring during Q1 of 2018, and we estimate that the total capital investment through completion by Getty of approximately $13 million. The investment in these redevelopment projects will generate incremental returns to the company in excess of what we could expect if we invested these funds in the acquisition market today. For more detailed information on Getty's redevelopment projects, please refer to Page 18 of our investor presentation, which can be found on our website.

We remain committed to optimizing our portfolio and continue to anticipate redevelopment opportunities over the next 5 years, possibly involving between 5% and 10% of our current portfolio, with targeted unlevered redevelopment program yields of greater than 10%.

As a result of our portfolio activities, we ended the quarter with 887 net lease properties, 10 active redevelopment sites and 5 vacant properties. Our weighted average lease term remained approximately 11 years. And our overall occupancy, not including our 10 active redevelopments, increased by 30 basis points to 99.4% as compared to 99.1% at the end of 2017.

Subsequent to quarter end, we completed the acquisition and leaseback of 30 properties as part of a larger transaction, whereby our tenant, GPM Investments, acquired the business operations and real estate of E-Z Mart, a privately held convenience and gas operator headquartered in Texas. The 30-property portfolio which we acquired include 17 sites in Texas, 7 in Arkansas, 3 in Oklahoma and 3 in Louisiana. GPM Investments, our tenant in the transaction, is one of our largest convenience and gas operators in the United States and has been a tenant of ours in other portfolio since 2004. The properties we acquired have an average lot size of 0.8 acres and an average store size of 2,800 square feet, which both enhance the quality and diversity of our portfolio. We funded $52.2 million at closing and expect to recognize initial full year rent of approximately $3.8 million.

While the acquisition market continues to be competitive in the convenience and gas sector, our pipeline of actionable opportunities remains strong, and we are in the process of reviewing and pursuing several additional acquisition opportunities for both single-asset and portfolio transaction. That said, as we have in the past, we remain disciplined in our underwriting to ensure we are making accretive acquisitions.

With that, I will turn the call over to Danion.

Thank you, Mark. Turning to our financial results. For the first quarter of 2018, our total revenues and revenues from rental properties, which excludes tenant expense reimbursements and interest income, grew 16% to $32.1 million, and 18% to $28.3 million, respectively. The primary drivers of the increase over the prior year's quarter were the impact of rent received from our 2017 acquisitions.

During the first quarter of 2017, we experienced relatively flat recurring property cost and general and administrative expenses. In addition, our environmental expense, which can be variable at times, was up $1.2 million as compared to a credit of $0.5 million in the first quarter of 2017. For more information on specific expense movements, please refer to yesterday afternoon's earning release.

Our FFO for the quarter was $17.8 million or $0.44 per share as compared to $18.2 million or $0.52 per share for the prior year's quarter. Our AFFO for the quarter was $16.8 million or $0.42 per share as compared to $14.2 million or $0.40 per share for the prior year's quarter.

Turning to the balance sheet, as Chris mentioned, we completed the refinance of our credit facility during the first quarter, which reduced the company's weighted average cost of borrowings and extended our weighted average debt maturity.

We ended the quarter with $375 million of borrowings, which includes $150 million under our credit agreement and $225 million of long-term fixed rate debt. Our weighted average borrowing cost is 4.6%, and the weighted average maturity of our debt is 4.5 years, with 60% of our debt being fixed rate and post our credit facility refinancing, we do not have any maturities until 2021. Our debt to total capitalization currently stands at 27%. Our total debt to total asset value is 34% and our net debt to EBITDA is 4.2x.

During the quarter, we did not issue any shares under our ATM program. Our environmental liability ended the quarter at $63.4 million, down $0.2 million so far this year. For the quarter, the company's net environmental remediation spending was approximately $1.5 million.

Finally, we are reaffirming our 2018 AFFO per share guidance of $1.68 to $1.74 per share, which now includes the impact of our recently announced acquisition. As a reminder, our guidance does not assume any future acquisitions or capital market activities, although it does reflect our expectation that we will continue to execute on our redevelopment, leasing, and disposition activities. Specific factors which impact our guidance this year include: one, the full year impact of earnings from our 2017 acquisitions; two, our expectation that we will forego rent when we recapture properties for redevelopment; three, our expectation that our weighted average cost of borrowings will increase in 2018; and four, the full year impact of the dilution associated with the company's 2017 capital raising activities.

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

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

(Operator Instructions) Our first question comes from the line of Craig Mailman of KeyBanc Capital Markets.

This is Laura Dickson here with Craig. Just wanted to confirm on guidance, since you're reaffirming even though it includes the impact of the acquisition, were there -- what are the other moving parts there?

Well, I think we're still relatively early in the year. I think we expect to continue our -- the rest of the performance of the business. And I think as the year progresses, we'll continue to evaluate what we think the appropriate guidance range is.

Okay. So no offsets, so just being conservative early in the year.

That's correct.

Okay. And then for the GPM deal, it sounds like -- can you discuss how deal was marketed? And it sounds like that came in at a low 7% cap rate. Is that correct?

So we expect to fund the recognized $3.8 million on $52.2 million of invested capital, so that's our initial cash year rent on the deal. The deal was priced kind of in the range that we've talked about for a long time, which is sort of at the 100 basis point range of 6 3/4% to 7 3/4%. How the deal came to us? GPM has been a tenant of ours for over 10 years. We have 2 existing portfolios with them in other areas of the country. So we're certainly -- we know each other quite well. And we were a part of that deal as we bought 30 properties. And I think in total, GPM acquired over 250 locations as part of the operations side of the deal. So happy to do a deal with an existing tenant who we like, and we've had a successful relationship with for a long time.

Okay, great. I guess, pro forma to the acquisition, what -- where would they stand on your top tenant list?

They would be in our top 5.

Top 5. And how comfortable would you be doing more deals with them given that exposure?

Yes. Well one of our goals that we've talked about is diversifying our revenue, right? We obviously have had some tenants that [could be then in the teens] in and as high as 20%. So what we're looking to do is continue to diversify revenue and to the extent we can continue to do deals with long-term partners and keep them sort of sub-20% or sub-15%, we would certainly look at that.

We will now take our next question from Anthony Paolone of JPMorgan.

Just to confirm on the last point on guidance, though. The $55 million, you didn't change your guidance for the year, but the $55 million that you'd actually done is in that number effectively already?

Correct.

Okay. And then can you comment on the contractual bumps that you got on the $52 million deal?

Yes, their annual contractual bumps at 1.5% a year.

Okay. And as you think about like the last couple of years, you've done a few portfolio trades, and you've been really changing the complexion of the portfolio now. Can you talk to how many of your stores are full-on C-stores with gas versus some of the legacy properties that really just had pumps and not much of a store allocated to it? Just give us those characteristics.

Sure. Well, this morning, we published our -- a new investment deck. On Slide 11, we've actually laid that detail out for the first time. So just to talk about what's on that slide is -- as of today, excluding the deal -- as of the end of Q1, excuse me, excluding the GPM deal, 74% of our properties have a convenience store. And of that 74%, 23% have some sort of C-store-QSR combo. And when we say QSR combo, you're talking not only about either a nationally branded QSR, such as Dunkin' or a Subway inside the store, but also private label prepared or hot food that our tenants are actually preparing themselves.

Okay, got it. And, sorry, I didn't see the deck yet, so maybe the answer this one, if you could. But what now -- what portion of the portfolio are you receiving financial statements or have a sense of EBITDAR cover, just kind of credit financials and stuff?

Yes, we receive site-level, tenant-level financials on about 60% of the portfolio today. Obviously, as we do more transactions, that's something that we're -- have been increasing over time. All of our recent deals, we do get site level our tenant-level financials on those. In addition to the 60% that we get today, there's probably -- there's another 25% of the portfolio where we get a corporate guarantee of a public company. So we don't necessarily see the site level, but we have an idea as to how the company is performing.

Got it. Any brackets around the rough EBITDAR coverage or the stores that you are getting financials on?

It's in our deck as well. Where we get we get site-level financial coverage (inaudible)

Okay. And then last question. I think in your comments, you mentioned in the deal pipeline auto-related sectors. What's that encompass?

Yes. That's the auto service, whether that's tire and battery, oil change, lube, some of the publicly traded parts stores. We view that as sort of a natural extension of our -- of kind of our underwriting.

We will now take our next question from Mitchell Germain of JMP Securities.

If I could ask Tony's question a different way. Obviously, some of the deals that you've done recently have improved the credit profile of your tenant base. Is there anything that, right now, that's of concern to you, whether it be a customer or performance of a certain store that's concerning?

We have a pretty active dialogue with all of our major portfolio tenants. In a portfolio of 900-plus properties at this point in time. I'm sure -- there's always a handful that we're working through with them, or at least all of our 5 vacancies that we're still working through. So we definitely have a watch list that our asset management team, who works for Mark, spends a lot time kind of working on. But this -- there's of any significance that concerns us at this point.

Great. Is -- what's the capital plan now that we've got the deal out there? How do you guys envision the balance sheet looking kind of post deal?

Yes, I think that the big focus for us will be to continue to kind of work on reducing our percentage of floating rate debt at this point.

Got you. And facilitated through the new Fitch rating, is that the way to think about that?

We certainly think that's going to be helpful as we look to raise debt capital, yes.

And if you can just remind me of longer-term targets on leverage.

Well, we've said numerous times that we'd comfortable running in the 4.5 to 5.5 debt to EBITDA levels. I think for the quarter, we were 4.2. Post quarter with the acquisition, obviously, that's probably going to tick up a little bit. But we're still at the low end of where we're comfortable at this point in time.

Great. Last one for me. Obviously, we've been hearing about a little bit of a rise in some development-type costs, labor, that sort of thing. Is the economics of your redevelopment changed at all? Or is it still kind of the same returns you've always been targeting?

Yes. No, nothing's really changed for us there, right? We're still targeting that kind of 300 basis point premium over the acquisition market for the entire program And if you look at what's been completed to date, I think we've been out -- I think our 3 completed projects to date 16% -- have averaged 16% incremental yield. So now we're still targeting the same levels internally.

You said on those, you said 16%?

So of the 3 projects we've completed, the average incremental yield has been 16%. But target -- program-wide, we're targeting north of 10%.

We will now take our next question from Joshua Dennerlein of Bank of America Merrill Lynch.

Are there any large like C-store portfolios out in the market that you might be looking at or not looking at?

Well, there's definitely a host of activity. I don't think that there's anything as large as, say, like the Kroger transaction that was traded earlier in the year. That's out there at this time. But there's certainly a host of one-off and small portfolios and medium-sized portfolios that we're in the process of reviewing and underwriting.

Okay, and have you seen any move kind of in cap rates since the start of the year, just given where interest rates have gone?

Yes. My view there is that they continue to be pretty sticky. There's certainly -- especially for the smaller deals, there's certainly a lot of money chasing them in the sector, which is keeping them -- keeping cap rates sort of compressed. Our view is that it's going to take a little bit of time for that -- the rise in the 10-year to filter through to the cap rate -- the market for acquisitions and the cap rates sort of toward the end of the year.

Okay. And then on -- how do you guys think about your cost to capital?

We have what we view as our long-term cost of equity and our cost to issue long-term fixed rate debt. And we look at what we think the appropriate split is for our business, which is where kind of our leverage metrics are. And I think it's been relatively consistent for us, since the start of the year. And I think we can still invest accretively in both the acquisition market and the redevelopment market.

We will now take our next question from John Massocca of Ladenburg Thalmann.

Two of your larger competitors, looks like they closed a sizable transaction with 7-11. Was this something you looked at? And is this the type of transaction you would pursue, given it's with kind of brand name, IG tenant? Or does pricing make -- or given pricing, does it make more sense to maybe pursue transactions with guys that are a little less brand name versus 7-11?

Well, 7-11 is tenant of ours. And we certainly like them as a credit in our portfolio. And I'd say, just broadly speaking, to the extent we can do transactions that make financial sense for us with investment-grade tenants, we would certainly like to do that. But we also believe in our ability to underwrite tenants who maybe are not rated in this sector, underwrite their credit and the performance of the stores and the real estate itself. So we certainly look at both types of transactions.

And those 7-11s in your portfolio, were those things you purchased as a 7-11? Or were those things that maybe became 7-11 either via the Sunoco purchase or other kind of purchases by 7-11?

Both. Yes, the short answer is both. So 7-11s been very acquisitive, so we've certainly benefited from that. But we've acquired 7-11s. I know we've had sites where the operator's been acquired.

And then kind of roughly speaking. How much potential do you think there is for continued credit upgrades within the portfolio from operator M&A? Operator M&A might not mean growth for you externally, but maybe internal…

That's a great question, I really think that you're going to see the top-20 participants in the industry continue to consolidate the next tier down or several layers down. So I would expect to continue to see some consolidation within our tenant mix. And just given who the big acquirers are at this point in time, I think that we would get a credit upgrade in the portfolio for some of those transactions.

With this -- we got another question from Craig Mailman from KeyBanc Capital Markets.

It's Laura again. Just a quick follow-up question about the debt issuance potentially in the year. You've got about $150 million outstanding on the line. Just wondering what you're modeling in terms of potentially terming it out in terms of like size. And like what rate you think you could issue at?

Well, I think that the recent rating with Fitch certainly helps, helps where we think we can issue at. I don't want to comment specifically on what our -- what we think our cost is. But I think we're looking to term out a significant portion of our floating rate borrowings through the balance of the year.

Okay. Do you have any sense of timing?

Not that I want to comment on, on this call.

At this time, we have no further questions. I'd like to turn back to Mr. Constant for any closure or further remarks.

Great. Thank you all for joining us. We appreciate your interest in the company, and we look forward to speaking to everyone in July, when we report our second quarter.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.