Getty Realty Corp (GTY) 2021 Q2 法說會逐字稿

Good morning, and welcome to Getty Realty's Earnings Conference Call for the Second Quarter of 2021. (Operator Instructions) 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 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 second quarter earnings conference call. Yesterday afternoon, the company released its financial results for the quarter ended June 30, 2021. 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 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 2021 guidance and may also include statements made by management in their remarks and in response to questions, including regarding the company's response to the COVID-19 pandemic, future company operations, and 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, 2020, our subsequent quarterly report on Form 10-Q, and our other filings made 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 definition of adjusted funds from operations, or 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 earnings call for the second quarter of 2021. With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer. I will begin today's call by providing an overview of our performance for the second quarter of 2021 and highlight the continued execution of our growth initiatives. And then we'll pass the call to Mark and Brian to discuss our portfolio and financial results in more details.

The net results of our stable in-place portfolio and the continued execution of our investment strategies was a 4.5% increase in total revenues and almost 19% increase in adjusted funds from operations, and 11.4% increase in AFFO per share. The company invested $44.1 million for the quarter and another $4.6 million just after quarter-end our year-to-date total investment activity which is $79 million in aggregate. The quarter was highlighted by the growing and steady pace of our investment activity, inconvenience of automotive retail assets. We continue to successfully execute on our multiple investment strategies, which include traditional sale-leasebacks, redivision acquisition of net leased properties, and construction loans or new-to-industry assets. We also broadened our portfolio further during the quarter by adding both new geographies as we added the state of Michigan and new tenants as we added both Valvoline and Mavis Tires to our roster.

The company also continues to benefit from the strong performance of target asset classes, as evidenced by our stable rent coverage of 2.6x. Once again, getting realized full normalized collections of our accruing rental income during the quarter as well as the covid related deferments we agreed during 2020 which we review this quarter. More broadly, industry data published this month by the National Association of Convenience Stores further demonstrate the health of the overall business to our sector and another record year of profits in 2020 despite the COVID pandemic. As we enter the second half of the year, we are pleased that our year-to-date investment activity has positioned the company to raise our AFFO guidance at quarter-end.

Looking ahead, we are committed to maintaining our healthy portfolio through active asset management. In addition, our team continues to work diligently to source and underwrite new opportunities to invest in our target asset classes to convenience stores, car washes, and automotive-related sales opportunity and by unlocking embedded value for selected redevelopments. We remain encouraged by the growing opportunities in our investment pipelines. We are confident that we're targeted investment approach is prioritized by real estate and strong metropolitan markets across the country. We'll continue to drive additional shareholder value during 2021 and beyond.

Finally, I would like to formally welcome Evelyn Infurna to our Board of Directors. Evelyn has a long track record of advising and investing in real estate companies in regions, and I'm excited about the value she will bring to our company. I look forward to working with her for years to come.

With that, I'll turn the call over to Mark, to discuss on our portfolio and investment activities.

Thank you, Chris. As of the end of the quarter, our portfolio includes 994 net lease properties, 6 active redevelopment sites, and 5 vacant properties. Our weighted average lease term was approximately 8.9 years and our overall occupancy, excluding active redevelopments remain constant at 99.5%. Our portfolio remains spread over 35 states Washington, D.C. and our annualized base rents, 65% of which come from the top 50 MSAs in the U.S. continue to be well covered by our training 12-month tenant rent coverage ratio of 2.6. In terms of our investment activities, we had another busy quarter in which we invested $44.1 million in 53 properties, and subsequent to the quarter, and we acquired one additional property for $4.6 million, bringing our year-to-date investment activity to $79 million across 60 properties. Our completed acquisitions during the second quarter included the purchase of 46 Valvoline branded oil chain centers for $31 million, and triple net leases which are guaranteed by Valvoline, Inc. were acquired with 11.5 years remaining base term and have multiple user options.

The properties are located primarily throughout the Detroit Grand Rapids, Lansing, MSAs, Michigan and the Toledo metropolitan area in Ohio. Additionally, we closed on the acquisition of 3 additional car wash properties for $10.4 million during the quarter. These properties were added to our existing unitary lease WhiteWater Express Car Wash and have approximately 15 years remaining on base term on multiple renewal options. These properties are located in Cincinnati, Ohio. Subsequent to the quarter-end, the company acquired a Mavis tire center located in Chicago, although MSA for $4.6 million. In the aggregate, we expect all of our completed acquisitions to generate cash yields that are in line with our historical quoted acquisition cap rate range for our targeted asset classes.

Getty also funded an additional $2.7 million of construction loans for 4 new industry convenience stores with free fuel, AC store operating with more than 100 locations across the Southeast United States and Texas. Bringing the total amount funded by Getty to $11.1 million year-to-date. As part of this transaction, we will accrue interest on our investment during the construction phase of the project and we expect to acquire the properties via sale-leaseback transaction at the end of the construction period. We ended the quarter with a strong investment pipeline and remain highly committed to continuing to grow our portfolio with convenience and automotive retail real estate, and we expect that we will continue to pursue direct sale-leaseback acquisitions of net lease properties and the funding for new-to-industry construction.

Moving to our redevelopment platform. During the quarter, we invested approximately $200,000 in sites which are in our pipeline. At quarter-end, we had 11 signed leases with letters of intent, which include 6 active projects, 4 signed leases on properties which are currently subject to triple net leases, but which have not yet been recaptured from the current tenants and one signed letter of intent on a vacant property. At quarter end, rent commenced on a redevelopment project leased to 7-Eleven in the Baltimore, Maryland MSA. We invested approximately $125,000 a project expected to generate a return of nearly 40% on that investment. Company expects to rent -- expects rent to commence at a number of additional redevelopment sites during the second half of 2021. In total, we have invested approximately $2.1 million in the 11 redevelopment projects in our pipeline and estimate that these projects will require total investment by Getty of $7.8 million. We project these redevelopments will generate incremental returns to the company in excess when we can invest in strongly in the acquisition market yet.

Turning to our asset management activities for the quarter. The company did not sell any properties but did exit 4 leased properties which had a minimis impact on our financial results. As we look ahead, we will continue to selectively expose the property that we determined are no longer competitive in the current format do not have compelling development extension.

With that, I will turn the call over to Brian to discuss our financial results.

Thanks, Mark. Good morning, everyone. I'll start with the recap of earnings, AFFO, which we be best reflect the company's core operating performance of $0.49 per share for the second quarter, representing a year-over-year increase of 11. The AFFO was also $0.49 per share. Total revenues were $38.7 million, representing a year-over-year increase of 4.5%. Rental income, which excludes tenant reimbursement to interest and mortgages receivables, grew more than 8% to $34.4 million. Strong acquisition activity over the last 12 months a primary driver. The additional contribution.

On the expense side, G&A costs increased in the quarter, primarily due to employee-related expenses with a stock-based compensation and nonrecurring retirement costs. Property costs and environmental expenses will increase in the quarter. The reduction in property costs was largely driven by decreases real estate taxes and certain professional fees related to refillment activities, and the decline in environmental expenses is mostly attributable to lower professional fees, and they expect to flow through AFFO. As we note each quarter, environmental expenses subjects to a number of estimates on non-cash adjustments and will continue to be higher rate.

Turning to the balance sheet and our capital markets activities. We ended the quarter with $542.5 million in total debt outstanding, including $525 million long-term fixed-rate unsecured notes and $17.5 million drawn against our $300 million incentive. Our weighted average borrowing cost was 4.2%, and weighted average maturity for debt of 6.8 years. In addition, our total debt to total market capitalization was 29%, our total debt to total asset value is 28%, and our net debt EBITDA was 5x. Each of these leverage metrics are calculated according to the terms of our loan agreements.

We have no debt maturity until June of 2023, other than our revolving credit facility which matures in March of 2022 has a 1-year extension option. In the selective with equity issuance under our ATM program during the quarter, raising $9.5 million at an average price of $32.94 per share. Year-to-date, we've raised a total of $30.3 million through ATM. In general, as we think about our mutual capital needs, we're committed to maintaining a strong credit profile, including meaningful liquidity and access to capital, look to moderate leverage and a well-laddered and flexible capital structure. With respect to our environmental liability, we ended the quarter at $47.9 million, which was a decrease of $150,000 from the end of 2020. For the quarter, net environmental remediation spending was approximately $1.4 million.

Finally, as a result of our investment and capital markets activities in the first half of the year, we're raising our 2021 AFFO guidance to a range of $1.89 to $1.91, a $0.03 per share increase from our prior guidance. This guidance includes transaction activity completed year-to-date. It does not otherwise assume potential acquisitions or capital markets activities for the remainder of 2021. Specific factors which may impact our guidance include variability with respect to certain operating costs, including environmental expenses, variability with respect to the recapturing of properties for redevelopment, which results in (inaudible) and our expectation that we will remain active in pursuing acquisitions at redevelopments which could result in additional expenses, including certain property demolition costs, transaction costs for deals that are not ultimately completed.

And with that, I'll turn the call back to Chris.

Thanks, Brian. Operator, we'll take questions.

(Operator Instructions) Our first question comes from Todd Thomas with KeyBanc.

First question I have is just on investment activity, which increased in the quarter compared to the first quarter, but it looks like closings have slowed a little bit in the last 1 to 2 months so as last update. I realize there's no incremental investment activity in the guidance. But just curious if you could comment generally on the pipeline and the pace of investments going forward as we move further into the second half of the year?

So this is Mark. As we broaden our investment strategy that we announced recently include the fall of other automotive asset classes. We're pretty comfortable in addition CNG opportunity we're pretty comfortable with the current state of our pipeline, the face of opportunities both inbound and opportunities that we've been generating for our business development. And I think that some of the closings are just nearly a factor of timing in face of a deal in each individual deal, but I think we're pretty comfortable where the pipeline is right now.

And I think you indicated that initial yields or cap rates are in line with the market. What does that look like today? What were the cap rates for the acquisitions completed in the quarter and can you talk about cap rate trends in terms of the future here?

So our acquisitions did have been in the mid to high 6% range. Some of that compression is due to kind of the overall market tightening kind of as well as I just referenced our broadening of our investment targets or different automotive verticals and some of those big former shower more competitive, but we continue to feel comfortable that we'll be able to deliver accretive acquisitions as we've done over the last few years.

And then just on the construction loans, can you just talk about that opportunity that you have there? Your desire to originate more constructions loans and also can you just remind us what kind of premium spread on pricing through the sale-leaseback you're achieving relative to the market pricing?

Yes. I think on the loan program, broadly speaking, on the industries that was target have been consolidating. Obviously, multiples are high as you expect and certain of our operators have chosen to really focus on their organic growth pipeline. And as we partner with existing relationships or new relationships, it's really a way to continue to do for our operators to grow their business and get in by the past, the ownership of the -- other than construction period. So I think the opportunity will continue to grow for us, it is just quite comfortable and we have the redevelopment capabilities in-house and this is a natural extension from that team. So we're pretty comfortable operating there. In terms of premium yield, they're certainly a premium over the acquisition market, I wouldn’t call it significant, and it does vary a little bit by sector, but again, we like the opportunity, I think it's going to continue to grow certainly applicable to all the target asset classes that we're focused on.

And is that an opportunity though that you have an opportunity you feel to ramp that program up more meaningfully?

I think it's going to continue to grow over time. I don't want to put a number on it or target range behind the process. Certainly feel like it's a average for getting into the quite capital accretive.

It's Brian. The one thing I would add is about the -- guarantee of it some of reagreement Chris -- what Chris said is not just building large loan portfolio per se. That's not the business that we're looking to get into. It's ways that we can add value to our partners, to our tenant partners and continue to work with them to help grow their platforms, which obviously helps us grow as well. And as Chris said explicitly, it gives us another path to fee simple ownership of the type of assets we want to own, and that's probably a key -- those last 2 pieces are really key component to it.

(Operator Instructions) Our next question comes from John Massocca with Ladenburg Thalmann.

Maybe just a little more on the kind of construction loan opportunity set and ultimately trying to pull those assets onto your balance sheet. I mean, are those type of transactions you're looking at primarily kind of greenfield de novo construction or is that like redevelopment where you're kind of coming in and kind of funding and developers redevelopment of an existing maybe out of date kind of few store concept and they're revamping that?

It's Mark. We've got a little bit of both, both with our existing in-place plants where they want to put material capital improvements into our lease properties, we partner with them to bring them up to industry standards. I would say it's more heavily tilted towards the greenfield as you said, the de novo buildings, where it's a net-new operation for our tenant partners, where it is truly state of the art. So in addition to all the financial metrics that were just discussed, it's kind of a reinforcement of our partnership with operators that want to be on the leading edge and due the industry delivering all the latest and greatest in meeting the consumer demand. So these are not only state of the art facilities, but obviously have a tremendously long useful life present well, look great and it's the program is repeatable with these key partners where it's a relationship to once we repeat their new program and we've become a kind of a dependable partner for them in that process.

And I guess maybe big picture, I mean, how big is the opportunity set in terms of essentially, how much kind of de novo disruption is there out there in the c-store space right now? Is it just some of the M&A activity is going to be a little bit more muted, I guess maybe in the near term?

Todd asked sort of a similar question. So I don't want to put a box around it, John. But what I would tell you is when you look across c-store sector, car wash sector in particular right, there is a significant amount of growth what we call a change to our operators, right. So as the traditional mom-and-pop c-store operator in car wash is maybe going away, there's an opportunity for tenants in the space to grow their brand, right, with their prototype store that Mark was talking about the state of the art facility, whether that's an express car wash tunnel or whether that's 5,000, 6,000 square foot c-store with a QSR side of it. The opportunity is certainly there for c-stores, car wash and -- condition which also has side of it -- how it to for that go-to destination or right across here a specific region or -- of a country. So again, I think it's certainly repeatable, but I'm not going to time frame or at the dollar amount behind.

And then on the balance sheet side of things, I mean, how should we think about ATM issuance going forward? I think if I heard correctly, you could see $9 million during the quarter in terms of dollar amount, which has seen on a gross investment basis, maybe a little bit kind of light versus kind of the in-place portfolio today, but I know it can kind of be variable quarter-to-quarter. But should we kind of still expect maybe on a net debt to EBITDA this 5% range to be a good target -- sorry, 5x range we good target going forward?

Yes, John, I think the ATM issues is not a function of a number of different factors. Leverage metrics, as you alluded to liquidity at the time in terms of on balance sheet, obviously, stock price and investment pipeline and all the rest. What we're really focused on, as I said in my prepared remarks, is ensuring that we maintain strong liquidity, access to capital to moderate leverage. And if you just go back to the end of 2020, we ended the year at -- I think it was just under 5x on leverage. The revolver was undrawn completely -- was early January when we paid off the year-end balance. And as a result of some asset sales and legal settlements a lot of cash on the balance sheet. So if you go back to again the end of the year, you'll see that to us being a little bit less active on the ATM in this first half of the year. And so I think as you go forward, we'll continue as we have and we stated a number of what our peers do tie our business leverage is right down the middle. I think, we typically said 4.5% to 5.5% maybe a different point in time 5x to 6x, but we're low to middle end of that range.

Our next question comes from Joshua Dennerlein with Bank of America.

I guess I was just curious on maybe an impact on inflation on your portfolio. Can you remind us maybe what percent of your portfolio is the like the CPI or -- just trying to get a sense of what you can see an acceleration in retirees resulted in inflation?

This is Brian, Josh. One fact I'll start with is upwards of 97%, 98% of our leases do have some escalator in them. So the bulk of the portfolio does have annual escalators of that roughly 2/3 is annual escalators. And then the balance is your typical 10% every 5 years or something thereabouts. On a CPI basis, it's de minimis there might be 1 or 2 leases, that's not a typical structure in our leases at least to date. So the blend of all that is about 1.6% annual. I think, it's a nice way to start off each year. Obviously, growth in our earnings and our value creation will be acquisition and redevelopment base as it is for most in our space, but I think that going into a year with that level of escalator is helpful.

And then the other thing I'll add, given that the majority of our activity in sale lease back activity as Mark said, we have and we'll continue to buy existing leases. But at least when you're originating your old leases and my humble opinion it gives us at least some opportunity by environment in the market is really changing from where it is and where it's been to at least have that conversation with tenants in respect of tenants about getting the different levels or different types of frequency of escalators in the leases. So a little bit more control over our destiny, so to speak, that if we were only acquiring in existing leases.

Yes, interesting. Have those conversations changed a lot, maybe in the last like year or 2? As far as like what you would want to at least?

I would think that you're talking specifically about escalators more than as Brian just mentioned, we strive for annuals or best to get annual increase is not something in certainly near term, but not a material change in the dynamic of those conversations.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Christopher Constant, for closing remarks.

Great. Thank you, operator. Thank you, everyone, for participating in our call this morning. We look forward to getting back on. We report our Q3 earnings in October and we appreciate your interest in Getty.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.