Getty Realty Corp (GTY) 2021 Q4 法說會逐字稿

Good morning, and welcome to the Getty Realty's Earnings Conference Call for the Fourth Quarter 2021. This call is being recorded.

(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 fourth quarter and year-end earnings conference call.

Yesterday afternoon, the company released its financial results for the quarter and year ended December 31, 2021. 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 2022 guidance and may also include statements made by management in their remarks and in response to questions, including regarding the company's future 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, 2020, subsequent quarterly reports filed 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 the 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 updated 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 fourth quarter and full year 2021. Joining us on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer.

I will lead off today's call by providing commentary on our year, summarize our performance for the fourth quarter and year ended 2021 and highlight the company's investments in capital markets activities. As usual, Mark and Brian are prepared to take you through the portfolio and financial results in detail.

As we enter 2021, we set a number of goals related to further diversifying and growing our portfolio, scaling our platform, increasing earnings and delivering strong returns to shareholders. I'm pleased to report that we achieved, and in many cases, exceeded all of our 2021 objectives.

We invested over $200 million across more than 100 convenience and automotive retail properties during the year, including more than $64 million for the fourth quarter and benefited from the continued strength of our in-place portfolio, from which we collected over 100% of this year's rents than all of last year's COVID-related rent deferrals.

Our strong external growth, contractual rent escalations and contributions from our completed redevelopment projects resulted in a growth of 8% cash rental income, a 14% increase in adjusted funds from operations or AFFO and a 7% increase in our AFFO per share.

Our investment activity for the year reflected a more diversified set of target asset classes, while maintaining a disciplined investment approach. Our strategy is to acquire high-quality real estate across the convenience and automotive retail sectors and to partner with strong and growing regional and national-branded operators.

Our investment spending in 2021 was the most diverse in the company's history as we acquired a variety of high-quality convenience store, car wash, auto service and drive-through restaurant assets. We've also introduced several new tenants to our portfolio, including Flash Markets, Mavis Tires, Refuels, Flash car wash, Valvoline and Whitewater Express car wash. We expanded our existing tenant relationships with high-quality operators, such as Go Car Wash, United Pacific and Zips Car Wash.

We are pleased by the success of our development funding program for new industry sites throughout the year and believe it complements both our core sale-leaseback financing product and our ongoing redevelopment initiative.

Having a flexible offering allows Getty to support our tenants as they grow their businesses through acquisitions, ground-up development or redevelopment and modernization of existing stores. In addition, rent commenced on 2 redevelopments with 7-Eleven for new convenient store locations during the quarter, bringing our 2021 total to 5 completed projects.

Since inception of the program, we have completed 24 projects and we maintained a solid pipeline of additional redevelopments, which we expect to come online over the next 1 to 5 years. Our balance sheet ended 2021 in excellent shape. We recast our revolving credit facility at more favorable terms in October, and we're active our ATM throughout the fourth quarter, ending the year with leverage under 5x net to EBITDA. As further demonstration to our commitment to financing our company for the long term in supporting our growth initiatives, 2 days ago, we announced the issuance of $225 million of senior unsecured notes on investment activity and proactively refinance our notes maturing in June 2023. Post this transaction, our revolving credit facility is completely undrawn, and we've addressed all debt maturities until 2025.

I want to reiterate our commitment to effectively executing on both new investments and the active asset management of our portfolio. We are mainly focused on acquiring high-quality retail real estate occupied by national and regional operators. Our investment strategy continues to focus on the automobile as the dominant form of consumer transportation in the United States, and we believe mobile consumers are prioritizing convenience, speed, quality and service more than ever before.

Convenience stores, car washes, auto service centers, parts retailers, drive-thru restaurants, these are the places where consumers are spending money in their cars and on their cars and where we will continue to allocate capital. Our team is as focused as ever on the growth of this company, and we are all working diligently to source and underwrite new opportunities in strong metropolitan markets across the country as well as to unlock embedded value through selective redevelopments.

We believe our success in 2021 demonstrates our ability to source opportunities that align with our investment strategies and that we are in a position to continue driving additional shareholder value in 2022 and beyond.

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

Thank you, Chris. As of the end of 2021, our portfolio includes 1,019 net lease properties, 4 active redevelopment sites and 5 vacant properties. Our weighted average lease term was 8.8 years, and our overall occupancy, excluding active redevelopments, remain constant at 99.5%. Our portfolio now spans 38 states across the country, plus Washington D.C. and our annualized base rents, 64%, which comes from the top 50 MSAs in the U.S., continue to be well covered by our trailing 12-month tenant rent coverage ratio of 2.6x.

During 2021, Getty underwrote a record $2.9 billion of opportunities to acquire freestanding convenience in automotive retail real estate. Canadian stores represented approximately 60% of our underwriting, with the remaining 40% being focused on the other automotive retail categories.

In terms of our investment activities, we had a very strong quarter, in which we acquired and provided development funding for 23 properties, totaling $64.4 million, bringing our full year total to 100 properties and $200 million. The 2021 activity included the acquisition of 97 properties for $94.3 million, with a weighted average initial lease term of 13.8 years and an aggregate initial cash yield of 6.7%. In addition, we ended the year with $5.7 million of funded construction loans for new industry developments, which were accruing interest at 6.9%.

To provide more color on our investment activity, we completed 3 transactions in the convenience and gas sector during the quarter. High selectivity in the C&G sector include closing on the second tranche of our sale-leaseback with Flash Markets, a subsidiary in Transit Energy Group. We acquired 7 additional properties for $30.3 million in this tranche, which are located throughout the Southeast United States with a concentration around Charlotte, North Carolina MSA.

Completing the acquisition of our second development funding project with Refuel in the Charleston, South Carolina MSA, our total investment in the project was $5.5 million including our final investment of $1.1 million during the fourth quarter. As per the terms of our development funding transactions, we acquired the property on completion of development, in conjunction with our final funding payment and simultaneously entering into a long-term triple-net lease.

In the carwash sector, we completed 2 transactions in the quarter, including acquiring our 6th newly constructed express tunnel car wash from Whitewater Express carwash in Michigan for $3.6 million and acquiring 2 additional properties from Splash Car Wash, which are located in the New York and Vermont markets. Our purchase price for the properties was $8.9 million.

In the auto service sector, we acquired 7 properties during the quarter. Highlights include the acquisition of the Mavis Tire store in the Greater Chicago MSA for $1.8 million and the acquisition of 6 automotives -- excuse me, automotive service sites in Chicago and Kansas City MSA for $8.2 million in the aggregate.

We also acquired one drive-thru, quick-serve restaurant in the Detroit MSA for $1.9 million and advanced $1.1 million of development funding with Splash for a new industry car wash located in New Haven, Connecticut MSA. As part of this transaction, we will improve just our investment during the construction phase of the project, and we expect to acquire the property via sale-leaseback upon completion and final funding. The weighted average initial lease term of our completed transactions for the quarter was 13.8 years and our aggregate initial cash yield on our fourth quarter acquisitions was 6.7%.

We began 2022 with a robust investment pipeline to support future growth and is compromised with a diverse set of asset classes, tenants and opportunities. These include direct sale-leasebacks, acquisitions of net lease properties and development funding for new industry assets. Subsequent to quarter end, we acquired 2 convenient store properties in the New Haven, Connecticut MSA from Global Partners for $7 million.

Moving to our development platform. During the quarter, we invested approximately $300,000 in both completed projects and sites, which remain in our pipeline. In addition, rent commenced on 2 development projects during the quarter. Both projects released the 7-Eleven to new-to-industry convenient stores in Texas. We invested 820,000 in these 2 7-Eleven projects and generated return on invested capital of approximately 26%.

For the year, we invested $1 million across our entire redevelopment platform and completed 5 redevelopment projects. The completed projects required $1.3 million of total investment, which was spent over multiple years and will generate an aggregate of $420,000 of incremental rent to the company.

Looking ahead, we have 7 signed leases or letters of intent, which includes 4 active projects, 2 projects of properties, which are currently subject to triple net leases, and have not yet been recaptured from the current tenants and 1 signed LOI on a vacant property. The company expects rent to commence at several additional projects over the next 1 to 3 years.

Turning to our asset management activities for the fourth quarter. We sold 10 properties realizing $13.7 million in gross proceeds and exited 2 leased properties. For the year, we sold 16 properties, realizing $24.5 million in gross proceeds and exited 11 leased properties. Of the 7 properties sold in the fourth quarter, represented the closing of 1 tranche of a planned divestiture of 21 sites to the existing tenant upstate State New York. Subsequent to quarter end, we sold the remaining sites for $10.1 million. We will continue to selectively dispose the properties that we have determined are no longer competitive and their current format did not have compelling redevelopment potential.

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

Thanks. Good morning, everyone. Before I provide a recap of earnings, I want to note that we've updated our definition of AFFO to adjust for stock-based compensation and amortization of debt issuance costs. This update was based on a comprehensive review of AFFO definitions across the net lease sector and was done to improve the comparability of Getty's AFFO when evaluating our results alongside our net lease peers. Our earnings release last night provided our results under both the updated and prior definitions. My commentary this morning will focus on our updated definition.

With that said, we reported AFFO per share of $0.54 for the fourth quarter, representing a year-over-year increase of 8% versus $0.50 per share reported in the fourth quarter of 2020. FFO was $0.47 per share for the fourth quarter of 2021. For the full year 2021, AFFO per share was $2.08, representing a year-over-year increase of 7% versus $1.94 per share reported in 2020. FFO was $1.88 per share for the full year of 2021.

Our total revenues were $39.4 million for the fourth quarter and $155.4 million for the year, representing year-over-year increases of 6.1% and 5.5%, respectively. Base rental income grew 8.7% to $35.6 million for the fourth quarter and 8.1% to $137.5 million for 2021. Strong acquisition activity over the last 12 months and recurring rent escalators in our leases were the primary drivers of the increase, with additional contribution from rent commencements that completed redevelopment projects.

On the expense side, G&A costs increased for both the quarter and the year, primarily due to employee-related expenses, including noncash stock-based compensation and for the year, $800,000 of retirement and severance expenses. Property costs declined in the fourth quarter and for the year due to reductions in both property operating expenses and leasing and redevelopment costs. Property operating expenses decreased due to lower rent expense and non-reimbursable expenses as we continue to exit lease sites and sell or redevelop other legacy properties. Leasing and redevelopment costs were lower primarily as a result of improved cost management within our redevelopment program.

Environmental expenses, which are highly variable due to a number of estimates and noncash adjustments, increased in both the quarter and the year due to certain litigation accruals and changes in net remediation costs, partially offset by a decrease in legal and professional fees.

Turning to the balance sheet and our capital markets activities. We ended the year with $585 million of total debt outstanding, including $525 million of long-term fixed-rate unsecured notes and $60 million outstanding on our $300 million revolving credit facility.

Excluding the revolver, our weighted average borrowing cost was 4.2% and the weighted average maturity of our debt was 6.5 years. Total indebtedness to total asset value was 34% based on the definitions in our credit agreements, while total debt to total capitalization was 31% and net debt-to-EBITDA was 4.6x. These latter 2 metrics have historically been reported using our credit agreement definition of total indebtedness, but have now been updated to use a more standard definition of debt, which does not include dividends payable and capitalized lease obligations.

Similar to our AFFO update, this change was based on a comprehensive review of credit metrics used across the net lease sector and was done to improve the comparability of Getty's leverage profile alongside our net lease peers.

As Chris mentioned, yesterday, we closed on a private placement of $225 million of senior unsecured notes, including $100 million of notes that were funded at closing, bear interest at a fixed rate of 3.45% and mature in February 2032, and $125 million of notes that will be funded in January 2023, their interest at a fixed rate of 3.65% and mature in January 2033. Proceeds from the notes funded at closing will be used to repay all amounts currently outstanding on our revolver with the balance used to fund investment activity.

Proceeds from the delayed funding notes will be used to prepay in full the $75 million or 5.35% unsecured notes that come due in June 2023 and the balance will be used to fund investment activity. Pro forma for yesterday's closing, our weighted average debt maturity increases to 7 years and pro forma for the delayed funding tranche, our weighted average debt maturity will be 7.4 years at the time of funding, and our weighted average borrowing cost will decrease to 3.9%.

Moving to our ATM program. We were relatively active in the fourth quarter, raising gross proceeds of $44 million at an average price of $31.98 per share. For the year, we raised total gross proceeds of $94.1 million through the ATM program at an average price of $30.93 per share. We're pleased with the results of our capital raising activities in the fourth quarter and thus far in 2022 and believe our balance sheet and overall credit profile position the company well to continue to execute on its growth plans.

With respect to our environmental liability, we ended the year at $47.6 million, which was a decrease of approximately $500,000 from the end of 2020. For the quarter and year, net environmental remediation spending was approximately $1.3 million and $4.4 million, respectively.

Finally, we're introducing our 2022 AFFO per share guidance at a range of $2.08 to $2.10 per share. Our guidance includes transaction activity to date but does not otherwise assume any potential acquisitions, dispositions or capital markets activities for the remainder of 2022. Specific factors that impact our initial AFFO guidance this year include cash proceeds from our recent notes offering that have not yet been deployed, the disposition of the upstate New York portfolio, but not the redeployment of the sale proceeds and approximately $700,000 of demolition costs for anticipated redevelopment projects, which run through property costs on our P&L.

With that, I will ask the operator to open the call for questions.

(Operator Instructions). Our first question is from Brad Heffern with RBC Capital Markets.

I was wondering if you could walk through the current pipeline and a directional expectation for acquisition volumes and cap rates in '22.

This is Chris. I'll start and then Mark can maybe address in more detail. And I think as we've laid out a more diversified strategy, which you've seen in recent years, is an accelerating pace of investment activity or diversity within the asset classes, how we're deploying that capital, where we're deploying that capital and we expect those trends to continue. But Mark, do you want to comment on current state of the pipeline.

Yes. So as we mentioned, we had a record year coming out of last year and opportunities that our initial underwriting criteria and coming out of last year going into this year, through the first few months of the year, we're ahead of the pace where we're at last year this time as far as active underwriting and as a result of the not only efforts of our acquisition investment team, but we're starting to see the delivery of the entree into the car wash vertical 2 to 3 years ago. We brought in our investment criteria into other automotive verticals approximately a year or so ago, and we're starting to deliver in those sectors. And we -- we expect to continue to grow momentum with regard to seeing opportunities that are out there in all those verticals. And by creating as much opportunity as possible, we feel confident to maintain our standards for qualifying real estate, qualifying geographies, market qualities, tenant balance sheet, tenant operation quality, so we don't have to deviate from our commitment to the standards that we've delivered on in the past.

Okay. Got it. And then just on the cap rate front, I mean, it seems like your acquisition number has been pretty stable for the past few quarters. Is that consistent with what you're seeing in the market? And then have you seen any sort of upward pressure on cap rates from where rates have gone? Or are you may be seeing any thinning out of the competition that you're seeing?

So I'll get -- there's a few questions in there. We certainly do not see any thinning out of competition. There's a lot of capital chasing transactions, and that leads to the second answer, which is we have not really seen cap rates respond to whether it's our cost or the market in general. We expect that to eventually filter in, but I think it's going to take, say, 6 to 9 months plus to just given how much capital is chasing net lease retail assets.

Our next question is from Todd Thomas with KeyBanc Capital Markets.

Just sticking with acquisitions, I guess, and thinking about on the funding side. So Brian, getting into '21 a little below the long-term leverage target at 4.6x you mentioned. Where do you expect leverage to be roughly at year-end? And are you planning to increase leverage from current levels as you fund investments and redeploy the proceeds from the dispositions.

Short answer there is balance sheet leverage philosophy remains unchanged. So obviously, as we go through the year, as you mentioned, we do have a material amount of liquidity coming out of the recent capital raising. But we're going to pursue the same paths we really have, right? So as that activity -- the investment activity drives capital needs, we'll work through our cash balances. We obviously have the revolver to continue to fund acquisitions. And we'll utilize the ATM program as it's prudent and appropriate to do so.

In terms of year-end leverage, again, I would just say our range to 4.5x to 5.5x is still applicable. Any actual number will really be dependent on the underlying activity.

Okay. And I appreciate the change in methodology, the reporting methodology around the new guidance. For the equity-based comp and amortization of debt issuance costs. I'm just curious if you can sort of provide maybe what the guidance would look like on a comparable basis to the '21 guidance, just in order to improve comparability as you transition to the new reporting methodology or at least provide a little bit of detail around those line items, just to help us sort through it a bit here.

Yes, of course. In 2021, it was about an $0.11 aggregate difference there. And I would think that I would use for your question, Todd, a similar number there. So you'd be looking at $1.97 to $1.99 on a comparable basis.

Okay. And then just a bigger picture question. I'm just curious if you could maybe talk a little bit about provide some insights, perhaps around the impact that maybe a shock in gas prices might have on the gas segment here in the near term and potentially in the longer term if prices stay high for an extended period of time. Just any insights just given the fluid and developing situation overseas?

Well, so I'll do my best to answer that, although it's very unprecedented what's happening, listing my time here. But typically, rapid movements in wholesale prices, which is what we're seeing right now, leads to margin compression at the street level. But the positive for getting right now of our tenants is that we were starting from a very strong place from a retail fuel margin, plus or minus $0.30, which is pretty significantly above historical average of profitability per gallon pump.

As the prices moved up rapidly, I think you -- if you're an operator, you probably expect to see some margin compression. The good news is I think the consumer has been absorbing that across the board, right, with the prices for everything going up. So this isn't just isolated to the cost of gasoline in their daily lives and our tenants at this point have not seen any erosion to volume. In fact, I think it's going the other way as the virus has subsided. So multiple factors at play. This is certainly an unprecedented time, but I think the one thing I would leave you with that we're starting from a very strong place, profitability standpoint from the fuel side of the business.

Okay. Do you think that this could potentially create any added uncertainty in the transaction market, either around gas stations, but also even car washes and other automotive if sort of consumption is changing? Or are there some potential behavioral changes, if anything, were to endure for an extended period of time? Could there be some hiccups in the transaction market for some of these segments at all?

Gosh, I really -- I really don't see this as a -- from a transaction market perspective, especially as you get away from the C&G portion of our business. Mark, you want to comment on that, but -- in my view, our C&G tenants are healthy, and there's a significant amount of transaction activity across our pipeline that is certainly some in the C&G area, but in all of our other asset verticals as well.

I don't see any impact on the ability to transact.

Our next question is from Wes Golladay with Baird.

Can you give us an update on what you expect for G&A this year? And can you also comment on the uptick in the environmental spend that was about $2 million this quarter?

Yes. Sure. Wes, this is Brian. In terms of G&A, I think last year, we were around $20 million. If you apply in this environment of kind of typical 4%, 5% that will get you to about $21 million. I feel like that's a good number for the year. And of that, about $5 million, again, round numbers is stock-based comp. So hopefully, that gives you some guidance around that. And in terms of environmental, it was primarily around a litigation accrual in the fourth quarter that -- Chris, I don't know if you want to go into any more of that, but it was a relatively nominal litigation accrual related to potential settlement on one of our active and ongoing cases.

Sorry, go ahead, Sorry, go ahead.

Okay. Sorry. Okay. And then on the dispositions, is there any more to do with that tenant? And I guess what drove the decision to sell? Was it the tenant coming to you saying they wanted to buy it? And if you could also kind of give us a little more color were these at the bottom 10% of the portfolio, bottom quartile? How should we think about the quality of these assets?

Yes. I wouldn't put these assets in a quartile. This is a portfolio that is all leads one tenant, the properties. Our tenant was looking to invest in the property, to update, modernize the stores. We were debating whether -- how we structure that. And ultimately, our tenants felt most comfortable putting the investment in if he owned the properties and that led to a negotiation and we ultimately decided to exit that lease. I wouldn't characterize it on the bottom 10, but certainly, properties that need some updating the capital (inaudible).

Got it. And I believe you said that the pipeline was about 60-40 C-stores last year. Do you expect that to be the same this year? And is there any segment where you have a higher close rate of the volume that you're seeing?

I think we'd like to grow all sectors and continue to balance the pipeline across all the verticals. I think it's -- sometimes it is a snapshot in time as the kind of the lumpiness of different opportunities present themselves to us. So the key is growing the top line pipeline to give us the most opportunities that we can have a really good view of in our underwriting model. So I think the goal is to grow all sectors throughout the pipeline.

(Operator Instructions). Our next question is from James Allen Villard with Ladenburg Thalmann.

Yes. Was the drive-thru restaurant transaction, a one-off deal? Or do you view QSRs as another growth vertical as you move forward?

Yes, it certainly fits with our broad convenience, automotive retail, right? So as we think about our property characteristics that we'd like to buy. We think those assets fit well with the portfolio, fits well with our teams on the convenience, consumer spending money while they're out in their vehicles. We have a number of our portfolio already. So this is just another transaction for us, and we certainly expect to continue to invest in that sector as well as our other verticals as we go forward.

We have reached the end of the question-and-answer session, and I will now turn the call over to Chris Constant for closing remarks.

Great. Well, thanks, everyone, for attending our fourth quarter call for 2021. We appreciate the interest in Getty, and we look forward to getting back on with everybody at the end of April, we will report our first quarter 2022 results.

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