Getty Realty Corp (GTY) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to Getty Realty's Earnings Conference Call for the Second Quarter of 2018. This call is being recorded.

Prior to starting the call, Joshua Dicker, 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.

Mr. Dicker, please go ahead.

Thank you. I would like to thank you all for joining us for Getty Realty's second quarter conference call. Yesterday afternoon, the company released its financial results for the quarter ended June 30, 2018. 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 it 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 the 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 periodic reports filed 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, which was revised at the end of 2017, 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 second 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 second quarter 2018 performance, investment activities and balance sheet initiatives; and then I'll pass the call to Mark to discuss our portfolio in more detail; and finally, Danion will discuss our financial results.

The second quarter continued our trend of steady performance from our core net lease portfolio. As expected, our revenues and adjusted funds from operations, both increased significantly, due to our investment activities completed in the second half of 2017 and in 2018 year-to-date.

For the second quarter, we reported net income of $13.5 million; funds from operations of $17.6 million; and adjusted funds from operation of $17.4 million, which grew by more than $2.5 million or more than 17% over the prior-year's quarter. Our quarterly AFFO per share of $0.43 increased by $0.01 per share, or 2.4% over the prior year's quarter.

We executed on both our acquisition and redevelopment platforms during the second quarter. We acquired 32 convenience, gas, and auto-related properties for $55 million in the quarter. As Mark will discuss in more detail, our previously announced portfolio transaction expanded our footprint in the Southern U.S. and our partnership with GPM investments, which is now our sixth largest tenant.

Turning to our redevelopment program, rent commenced on 2 projects during the quarter, bringing our total number of completed projects to 5, in addition to our pipeline of 14 projects, which are detailed in our investor presentation. We continue to underwrite additional transactions in the convenience, gas, and auto-related sectors.

Overall, the volume of opportunities available for these types of assets remain strong and we continue to see competition from both our REIT peers and other institutional real estate investors.

With that said, we are staying true to our underwriting criteria. 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.

In addition, we are pursuing additional redevelopment projects and selectively disposing off properties where we have made the determination that the property is no longer competitive as a convenience and gas location and does not have redevelopment potential.

During the quarter, we also completed a $100 million 10-year private placement with Prudential, a long time capital partner of the company; and MetLife, a new relationship for us. With the completion of this debt transaction, the company now has approximately 80% of its debt being fixed rate, the highest level in the history of the company, and we do not have any debt maturities until 2021.

As we move through the second half of 2018 and beyond, we continue to benefit from the stability of our cash flow from our core net lease portfolio and our conservative balance sheet. We remain focused on our 3-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 will 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 activities.

Thank you, Chris. I'll start by reviewing our investment activities; then provide additional detail on our redevelopment projects and portfolio in general. During the quarter, we acquired 32 properties for $55.3 million. 30 of the properties we acquired was part of our transaction with GPM investments that we discussed on our last call.

As a reminder, the 30-property portfolio is located in Texas, Arkansas, Oklahoma and Louisiana with approximately 1/3 of the properties being in the Dallas-Fort Worth MSA. The properties we acquired have an average lot size of 0.8 acres and average store size of 2,800 square feet, both of which enhance the quality and diversity of our portfolio. We expect to recognize initial full-year rent of approximately $3.8 million.

In addition, during the quarter, we acquired 2 properties in individual transactions for $2.7 million in the aggregate. The first property is a convenience and gas site in North Carolina. The other property is an auto parts store in the Greater Chicago market.

Turning to our redevelopment program. During the quarter, rent commenced on 2 projects. The first was a long-term triple net lease with AutoZone, a publicly-traded parts retailer. In this project, our total investment is approximately $400,000 and we achieved an incremental return on our investment of 17%.

Our second rent commencement this quarter was a long-term triple net lease to TruMark Financial, a regional credit union. In this project, we invested approximately $500,000 and achieved an incremental return on our investment of 27%. To-date, we have completed 5 projects with an aggregate incremental return on investment of 18%.

Turning to our redevelopment pipeline. We ended the quarter with 14 signed leases and LOIs, which include 9 active projects and 5 projects on properties which are currently included in triple net leases, but which will be removed when we receive various approvals required to commence construction.

Our pipeline includes a wide range of retail uses such as enhanced convenience stores and gas station, specialty retail such as automotive parts and service, and quick-serve and fast casual restaurants. All of our projects are continuing to advance through the redevelopment process. We expect substantially all of these projects will be completed over the next 1 to 3 years, with several additional projects moving to rent commencement in 2018.

To-date, we have invested approximately $4.5 million in both completed and in progress redevelopment projects with $1 million occurring during the second quarter of 2018. And we estimate that the anticipated total investment through completion for the 14 projects currently in progress by Getty will be approximately $12.6 million.

The investment in these redevelopment projects will generate incremental returns to the company in excess of what we could expect if reinvested 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 the 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%.

Finally, during the quarter, we disposed of 2 non-core locations for $3.7 million in proceeds. As a result of our portfolio activities, we ended the quarter with 918 net leased properties, 9 active redevelopment sites and 5 vacant properties. Our weighted-average lease term is approximately 11 years and our overall occupancy, not including our 9 active redevelopments, increased to 99.5%.

With that, I turn the call to Danion.

Thank you, Mark. Turning to our financial results. For the second quarter 2018, our total revenues and revenues from rental properties, which excludes tenant expense reimbursements and interest income, grew 18% to $34.2 million, and 19% to $29 million, respectively.

The primary drivers of the increase over the prior year's quarter were the impact of rent received from our investment activity in the second half of 2017 and 2018 year-to-date.

During the second quarter of 2018, our property cost increased by $1.2 million, primarily due to reimbursable real estate taxes, which are due from our tenants. In addition, our environmental expense, which can be variable at times, was up $1.1 million as compared to the second quarter of 2017, primarily due to increases in legal and professional fees associated with environmental litigation matters. For more information on specific expense movements, please refer to yesterday afternoon's earnings release.

Our FFO for the quarter was $17.6 million or $0.43 per share, as compared to $19.9 million or $0.57 per share for the prior year's quarter. Our AFFO for the quarter was $17.4 million or $0.43 per share as compared to $14.9 million or $0.42 per share for the prior year's quarter.

Turning to the balance sheet; as Chris mentioned, we issued the company's first-ever 10-year fixed-rate note during the quarter. The $100 million notes is split evenly between Prudential and MetLife, bear interest at 5.47%. The proceeds from our note issuance we'll use to repay floating rate borrowings on our credit facility.

We ended the quarter with $415 million of borrowings, which includes $90 million under our credit agreement and $325 million of long-term fixed rate debt. Our weighted average borrowing cost is 5.1%, and the weighted average maturity of our debt is 5.7 years, with approximately 80% of our debt being fixed rate. And post our credit facility refinancing, we do not have a debt maturity until 2021. Our debt-to-total capitalization currently stands at 27%. Our total debt to total asset value is 37%, and our net debt-to-EBITDA is 4.6x.

In addition, we use our ATM program during the quarter and issued $14.1 million of capital at an average price of $26.20 per share. Our environmental liability ended the quarter at $61.8 million, down $1.7 million so far this year. For the quarter, the company's net environmental remediation spending was approximately $3 million.

Finally, we are reaffirming our 2018 AFFO per share guidance of $1.68 to $1.74 per share, which includes the impact of 2018 acquisition activities year-to-date and our $100 million debt private placement. As a reminder, our guidance does not assume any future acquisitions or capital markets 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 included; one, the full year impact of earnings from our second half of 2017 and 2018 year-to-date acquisitions; two, our expectation that we will forego rent when we recapture properties from our net lease portfolio 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 and 2018 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) We'll hear first from Mitch Germain with JMP Securities.

Chris, you said you're underwriting -- you're sticking with your underwriting and I'm curious, is that a comment that you're seeing any pricing changes within the market?

Not really, it's primarily the volume of opportunity is primarily related to the consolidation that's going on in the convenience and gas sector. It continues to be strong. But in our opinion, it doesn't. Some opportunities that are better for operators are not necessarily real estate that we want to purchase and hold long term. So it really is a comment on being selective in terms of how we think about acquiring real estate that we expect to own for a very long time.

And then, with regards to how fragmented the industry is, maybe a couple of questions there and number one, is the current pricing environment making the decision to sell our estate planning decisions a little more, I guess, quicker to take advantage of where pricing is? And then two, any change in the competitive landscape in terms of who you're bidding against for some of these deals?

So first question is, I think each situation in terms of who the seller is, is unique or can be unique. So I'm not sure there's any central theme as to why there's really an acceleration of the M&A in the sector other than there are large companies out there that have become serial acquirers that really are [consulting] industry and enhancing the overall store product and really growing their overall store base. The second question, sorry I forgot your second question that's -- can you repeat that?

The competitive landscape?

Listen I think if we think about convenience and gas and the other auto-related sectors I think there is a significant amount of capital both from our public REIT peers or many of our public REIT peers, but also other institutional real estate capital that has been active in the sector for the last several years and, quite frankly, I only see that pace increasing, so...

We'll move next to Craig Mailman with KeyBanc.

This is Laura Dickson here with Craig. Saw that you issued equity in the quarter, you're trading at a premium to NAV and our estimates, so just was wondering how that makes you think about using the ATM -- like continuing to use the ATM at these levels and does that help make some more deals pans off?

Well, we invested $55 million in acquisition plus another $1 million in redevelopments in the quarter and we've talked about kind of continuing to maintain a very strong conservative balance sheet. So with making additional investments, we thought we could use the ATM to continue to maintain the profiles from a leverage perspective that we're comfortable with. Really we think we have the balance sheet that will afford us the opportunity to continue to grow and the ATM can certainly be part of that going forward.

And then just following up on the acquisition environment, are you able to quantify what's in the acquisition pipeline currently?

We don't disclose that in any level of detail. I will say that we are on track to probably review the same type in terms of volume of opportunities this year that we underwrote last year. And again, I'll just say that the pipeline is strong. There continues to be portfolio transactions and one-off transactions that are coming in, that we're reviewing and we're really sticking to our underwriting criteria and hoping that we can find deals that fit that model and that we can close.

(Operator Instructions) We'll hear next from John Massocca with Ladenburg Thalmann.

So kind of going on the acquisition front again, GPM has been pretty active, I mean they recently did a deal with Champlain Oil. I mean is that type of transaction that you could be involved in or are those assets potentially to [rural] -- to really be attractive to you?

So the Champlain Oil deal with Global who is one of our other tenants, not GPM and it really -- we have ongoing dialogs with all of our tenants; Global who happens to be our largest tenant or GPM who is now our sixth largest tenant. And there is -- there are wonderful operations such as the Champlain transactions that we certainly have taken a look at that maybe don't necessarily fit some of the underwriting criteria from a real estate perspective that we would like to see. But each situation, John, is unique and we'll certainly take a look at it and work with our existing tenant base or new tenants to see if purchasing properties and entering into a new lease makes sense.

And then, it was kind of interesting that you completed a development with a leading auto parts retailer and you did 1 granular acquisition with an auto parts retailer. Is the development program a source and kind of a way for you to generate relationships in that space that could drive future acquisition activity?

Yes, I think that's certainly one of the benefits we're seeing from the redevelopment program. We happened to have a portfolio of properties, many of which are in Northeast and Mid-Atlantic that are very, very well located primarily on corners and [entrance] markets and those properties can fit a lot of stand-alone retail users. I think Mark talked about some of the other auto sector. Some of the other sort of quick serve, fast casual restaurants or other specialty retail. And when you have a property that fits kind of some of the attributes that a lot of the leading retailers are looking at, it certainly help to start a dialog and that leads to perhaps other redevelopment opportunities or debt further down the line, perhaps acquisition opportunities.

Could you see acquisition opportunities in some of the kind of developments, the assets that you're developing that maybe aren't really in that auto parts, gasoline kind of silo that you've primarily been in?

From a net lease acquisition standpoint, I think we're really trying to stay focused on our convenience and gas and other auto-related sectors. I really -- I think that's the history of the company. I think that's where our relationships are. I'm not sure it makes sense for us to really branch too far away from that.

And then kind of last a little detailed question, the Millerton development project, what kind of happened to that, it came off the list this quarter? Millerton, New York.

Yes, I mean that's right, this is part of the development. We had a signed lease for that with a well-known retailer. We needed some land use approvals on the local level, which we didn't get and that project is kind of off the table at this point. So we're reevaluating Millerton and we'll find the best home for that property and keep adding new projects to the redevelopment portfolio this quarter and in future quarters.

(Operator Instructions) We'll go now to Tony Paolone with JP Morgan.

I think in your comments, you mentioned, I think it was 5% to 10% for the portfolio over time being up for redevelopment, but I can't remember what the timeline was. Just curious with the gating factors are for that, given the returns are pretty high, wondering why not accelerate that?

Tony, it's really -- a lot of our properties are subject to long-term triple-net leases where it's -- we may not have access to the property or we may have to negotiate with our tenants to recapture the property and those types of negotiations on 15-year leases can be challenging. So I think what we've talked about is the 5% to 10% is properties where they are either being currently held in development or currently held vacant while we're completing our redevelopment lease, but also the leases where we actually negotiated a contractual right to be able to recapture properties based on a formula. So not all of our leases have that same recapture feature to them, which is why I think you're seeing us kind of hold to that 5% to 10% of our overall portfolio.

Okay. So hence why I guess it will take a while to get there. The other item is, on the environmental side, I know it's something that's faded over the last couple of years. Are those costs at this point, still all related to legacy assets or do other assets go into that mix over time? And wondering when -- if there is a point in time in the future where that just is -- is just gone and no longer part of the story?

Well, the vast, vast majority of our environmental liability is associated with our legacy properties, and we continue to believe that is in our best interest to spend significant sums to reduce that liability. It's really pure construction and -- or digging and monitoring over time. And we do hope to get to a place Tony where, at the end of the day, we're not on these types of calls talking about environmental. And I think a nice feature from our side on environmental is again, it's all related to legacy properties, it all dates back to when this company or the history of this company used to be an operator, and we had direct responsibility in our other properties, which we've acquired which were not part of our history, we've not had any significant experience where there's been environmental liability that comes back to our balance sheet.

Alright, I mean is the number of properties associated with the liability continuing shrink? Like is there progress being made there?

Yes, we don't disclose the overall number of properties that are inside of our environmental liability. But yes, that number of open incidents continues to come down quarter-over-quarter.

And at this time, we have no further questions. I'd like to turn the call back to Mr. Constant for any closing or further remarks.

Alright. Well, thank you, everyone, for being on the call today and for your interest in the company, and we look forward to speaking to everyone when we report our third quarter in late October.

This now concludes our conference call. You may disconnect at this time.