Q2 2021 Getty Realty Corp Earnings Call
Good morning, and welcome to Getty Realty's earnings conference call for the second quarter of 2020.
This call is being recorded.
After the presentation, there will be an opportunity to ask questions.
Prior to starting the call Joshua Dicker Executive Vice President General Counsel and Secretary of the company will read the Safe Harbor statement and provide information about non-GAAP financial measures. Please go ahead Mr. Decker.
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 32021.
The form 8-K and earnings release are available on the Investor Relations section of our website at Getty Realty.
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Certain statements made in the course of this call on 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.
Forward looking statements.
Examples of forward looking statements include our 2021 guidance and May also include statements made by management in their remarks on in response to questions, including regarding the company's response for the COVID-19 pandemic.
Future company operations and financial performance on the Companys.
Company's acquisition of redevelopment plans and the 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 quarterly reported.
The form 10-Q and of our other filings made with the SEC for a more of a 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.
Takes 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 for a F F <unk> and our reconciliation of those measures to net earnings with that let.
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 over the year, our Chief operating officer, and Brian Dickman, Our Chief Financial Officer.
Ill begin todays 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 detail.
The net result 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 an 11, 4% increase in <unk> per share.
The company invested $44.1 million.
The quarter and another $4.6 million just after quarter end.
On our year to date total investment activity to $79 million in aggregate.
The core was highlighted by the growing and steady pace of our investment activity and convenience of automotive retail assets. We continued to successfully execute on.
Our multiple of investment strategies, which include traditional sale leasebacks accretive acquisitions of net lease properties and construction loans for new to industry assets.
We also broadened our portfolio further during the quarter by adding both new geographies as we add of the state of Michigan and new.
Tenants as we added both valvoline and made his 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 2.6 times.
Once again Getty realized full normalized collections of our recurring rental income.
In the core as well as the Covid related deferments, we agreed to in 2020, which were due this quarter.
More broadly industry data published this month by the National Association of convenience stores further demonstrates the health of the overall in the store sector.
Which had another record year of profits in 2020 despite.
Income from the 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 <unk> guidance at quarter end.
Looking ahead, we are committed to maintaining our healthy portfolio for active asset management.
In addition, our team.
The core work diligently to source and underwrite new opportunities to invest in our target asset classes for the convenience stores car washes and automotive related retail properties and.
And by unlocking embedded value through selective redevelopments.
We remain encouraged by the growing opportunities on our investment pipeline.
Can you still confident our targeted investment approach, which prioritize acquiring real estate of strong metropolitan markets across the country.
We will continue to drive additional shareholder value as we move from 2021 and beyond.
Finally, I would like to formally welcome Evelyn and firm to our board of directors.
Evelyn has a long track record of advising and investing in real estate companies in the reach and I am excited about the value of shares will bring to our company and look for.
To work with her for years to come.
With that I will turn the call over to Mark to discuss our portfolio of investment activities.
Thank you Chris.
As at the end of the quarter our portfolio.
We also includes 990 for net lease properties 6 active redevelopment sites and 5 vacant properties our.
Our weighted average lease term was approximately 8.9 years and our overall occupancy excluding active redevelopments remains constant at 99, 5%.
Our portfolio remains spread over 35 states, plus Washington, DC, and our annualized base rents, 65% of which comes from the top 50 Msas in the U S continued continue to be well covered by.
Our trailing 12 month tenant rent coverage ratio of 2.6 times.
In terms of our.
Our investment activities, we had another busy quarter in which we invested $44.1 million and 53 properties and subsequent to the quarter.
And we acquired 1 additional property for $4.6 million, bringing our year to date investment activity to $79 million Cross 60 properties.
For completed acquisitions during the second quarter included the purchase of 46, Valvoline branded oil change centers for $31 million the.
The triple net leases, which are guaranteed by Valvoline, Inc. Were acquired with the 11.5 years remaining base term and have multiple renewal options the.
The properties are located problem.
Primarily throughout the Detroit Grand Rapids, Lansing, Msas in Michigan in the Toledo Metropolitan area in Ohio.
Additionally of closed on the acquisition acquisition of 3 additional car wash properties for $10.4 million during the quarter.
These properties were added to our existing unitary lease with whitewater ex.
Breast carwash and have approximately 15 years remaining on.
Of the base term multiple renewal options.
These properties are located in Cincinnati, Ohio.
Subsequent to the quarter end the company acquired a Mavis tires said center located in the Chicago, Illinois, MSA for $4.6 million.
In the aggregate and 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 for new to industry convenience stores with free fuel a C store.
Brady with more than 100 locations across the southeast United States and Texas, bringing.
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 investments during the construction phase of the project and we expect to acquire the properties the.
The sale leaseback transaction.
Store often at the end of the construction period.
Okay.
We ended the quarter with the strong investment pipeline remain highly committed to continuing to grow our portfolio with convenience in automotive retail real estate and we expect that we will continue to pursue direct sale leaseback acquisitions of net lease properties and funding for new to industry construction.
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Moving to our redevelopment platform during the quarter, we index invested approximately $200000 in sites, which are in our pipeline.
At quarter end, we had 11 signed leases or letters of intent, which includes 6 active projects for signed leases on properties, which are currently subject.
To triple net leases, but which have not yet been recaptured from the current tenants and 1 sign of letter of intent on the vacant property.
At quarter end rent commenced on a redevelopment project at least 711 for the Baltimore, Maryland, MSA, we invested approximately 125000 of the project expect to generate a.
Structure of nearly 40% on that investment.
The 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.
Return on investment by Getty of $7.8 million.
We project. These redevelopments will generate incremental returns for the company and its in excess of where we could invest these funds in the acquisition market today.
Turning to our asset management activities for the quarter of the company did not sell any properties, but did exit for leased properties, which.
Which had a de minimis impact on our financial results.
As we look ahead, we will continue to selectively dispose of properties that we have determined are no longer competitive in their current format to not have compelling redevelopment potential.
With that I will turn the call over to Brian to discuss our financial results. Thank.
Thanks, Mark good morning, everyone.
Star.
For a total cap of earnings <unk>, which we believe best reflects the Companys core operating performance was <unk> 49 per share for the second quarter, representing a year over year increase of 11 for the second.
NAREIT <unk> was also of 49 per share for the quarter.
Our total revenues were $38.7 million representing a year.
Year over year increase of 4.5%.
Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables grew more than 8% of $34.4 million.
Strong acquisition activity over the last 12 months at the current rent escalators on our leases were the primary drivers of free.
Additional contribution from rent Commencements.
Okay.
For the projects.
And the expense side of G&A costs increased in the quarter, primarily due to employee related expenses, including stock based compensation and nonrecurring retirement costs as well as circumspection on fees.
Property costs and environmental expenses, both decreased in the quarter the reduction of property costs was largely.
By decreases in real estate taxes sort of professional fees related to redevelopment activities and the decline of environmental expenses was mostly attributable to lower professional fees and related expenses that flow through to <unk>.
As we know what each quarter environmental expenses are subject to a number of estimates noncash adjustments and will continue to be highly variable.
Driven turning to the balance sheet and our capital markets activities. We ended the quarter with $542.5 million of total debt outstanding including $525 million of long term fixed rate unsecured notes and $17.5 million drawn against our $300 million revolving credit facility.
Our weighted average borrowing cost was 4.2% in.
On the weighted average maturity of our debt was 6.8 years.
In addition, our total debt to total market capitalization was 29% our total debt to total asset value was 38% and our net debt to EBITA was 5 times.
Each of these leverage metrics are calculated according to the terms of our loan agreements.
We have no debt maturities until.
Till June of 2023, other than our revolving credit facility, which matures in March of 2022, but as of 1 year extension option at our election.
For a selective with the 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.
And through the ATM program.
In general as we think about our future capital needs. We are committed to maintaining a strong credit profile, including meaningful liquidity and access to capital low to moderate leverage and a well ladder and flexible capital structure.
With respect to our environmental liability, we ended the quarter at $47.9 million, which was.
The decrease of 150000 from the end of 2020 for the quarter net environmental remediation spending was approximately $1.1 zone.
Finally, as a result of our investment and capital markets activities in the first half of the year for raising our 2021 and <unk> guidance to a range of $1.89 to $1.91 of 3 cent per share increase.
<unk> from our prior guidance.
This guidance includes transaction activity completed year to date, but does not otherwise assumed 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 of sport on rent.
And our expectation that we will remain active in pursuing acquisitions of the developments, which could result in additional expenses, including certain property of demolition costs and transaction costs for deals that are not ultimately completed.
And with that I'll turn the call back.
The abilities.
Brian.
Operator, we'll take questions at this time.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask the question. Please press star 1 on your telephone keypad for.
Can call indicate your line is on the question.
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For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Todd Thomas with Keybanc. Please proceed with your question.
Hi, Thanks, good morning.
First question.
Chris I have is just on investment activity, which increased in the quarter compared to the first quarter, but it looks like closings of slowed up a little bit in the last 1 the 2 months since the last update I realize there's no incremental investment activity on the guidance, but just curious if you can comment generally on the pipeline and the pace of investments going forward as we move further.
[noise] until the second half of the year.
Yeah.
So this is mark.
R. R. As we broadened our investment strategy that we announced recently to include all other automotive asset classes, where for pretty comfortable you know in addition, the CMG opportunities, we're pretty comfortable with the.
The current state of our pipeline.
2 of our opportunities both inbound intense.
Opportunities that we've been on generated for our business development.
So I think that.
Some of the closings for just nearly a factor of timing and the pace of the deal.
Each individual deal, but I think we're pretty coupled with the pipeline is right now.
Okay, and and you I think you indicated that initial yields or cap rates are in line with the market you know what what does that look like today what were the the cap rates for the acquisitions completed in the quarter on can you talk about cap rate trends.
Just in terms of the future here.
Sure.
The pace of in our our acquisition it had been in the mid to high 6% range some of that compression.
Is due to kind of the overall market tightening of kind of as well as I just referenced.
Referenced our broadening of our investment.
Targets through different automotive vertical.
So and some of those being more mature of more competitive.
But we continue to feel comfortable that we'll be able to.
For accretive acquisitions as we've done over the last years.
Okay, and then just the on the construction loans.
Can you just talk about you.
That opportunity that you have there.
On your desire to originate more construction loans and also can you just remind us what kind of premium spread on on pricing through the sale leasebacks youre achieving relative to the market pricing.
Yeah, I think the on the the loan program.
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Broadly speaking.
As the industries that we target have been consolidated.
Obviously.
Multiples are.
Hi.
We would expect.
And certain of our operators have chosen to really focus on their organic growth pipeline.
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As we.
Partner with existing relationships for new relationships, it's really a way to continued for our for our operators to continue to grow their business and forgetting to find a path to the ownership at the end of the construction for so I think the opportunity well.
Continue to grow for us and we're quite comfortable.
We have the redevelopment capabilities in house and this is the natural extension.
From that team so we're pretty comfortable operating there.
In terms of premium yields are certainly of premium over of the acquisition market on it and I wouldn't call it significant and it does vary a little bit by sector, but.
Again, we like the opportunity we think it's going to continue to grow.
Certainly the applicable to all of the target asset classes that we're focused on.
And is that an opportunity, though that that you.
Do you have do you have an opportunity you feel the ramp that program up more meaningfully.
I think it's kind of continue to grow over time, I don't want to put a number on it or a target range behind the top of it.
We certainly feel like it's the Knapp you for gate to deploy capital Accretively.
It's Brian the 1 thing I would add I think we spoke about the the objective and somewhat reiterated the Chris what Chris said it is not to building.
Large loan portfolio of per Se right.
That's not the business that we're looking to get into it.
Ways that we can add value to our partners to our tenant partners.
For you 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 the fee simple owner.
Building of the type of assets, we want to own and that's probably the key those last 2 piece of really key component to it.
Okay alright, thank you.
Thank you.
And the reminder of if you'd like to ask a question. Please press star 1 on your telephone keypad. Our next question.
That comes from John Mexico with Ladenburg Thalmann. Please proceed with your question.
Good morning.
Yes.
So maybe just a little more on the kind of the construction loan opportunity set and ultimately you know trying to pull those assets onto your balance sheet. I mean are those type of transactions you are.
We're looking at primarily kind of Greenfields.
De novo construction or is that like redevelopment, where you're kind of coming in and.
Kind of funding of developers redevelopment of an existing may be out of date kind of as he starts on stepped in and you know the.
The revamping that.
This is mark.
<unk> on a little bit of both both with our existing in.
In place tenants, where they want to put material capital improvements into our lease properties will partner with them to bring them up to.
The industry standards.
Say it was it's more heavily tilted towards the Greenfield as you said the de Novo.
We buildings, where it says net new opt.
Operations for our part of our tenant partners, where it is truly state of the art. So in addition to all of the.
The financial metrics that were just discussed you know its kind of of a reinforcement of our partnership with operators that and 1 of the on.
On the leading edge in the industry delivering all of the the latest and greatest in the meeting the consumer demands. So these are.
Not only stay of the our facilities, but obviously have a tremendously long useful life.
The present, well look great and.
It's the the program is repeatable.
With these key partners, where each relationship to 2 of our instant.
The repeat on their new program and we've become on 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 of how much kind of de novo construction is there.
Out there in the C store space right now is it.
Yeah, just given at that time like some of the M&A activity is going to be a little bit.
More muted I guess, maybe in the near term.
Top Todd on sort of a similar question, but I don't want to put on a box around of chunk, but.
What I would tell you is if you look across the C store sector of the car wash.
Center for.
Particular, right there is a significant amount of growth what we call. It change tour operators right. So as the traditional mom and Pops heat tour operator of Carwash, maybe going away. There is an opportunity for for tenants in the space to grow their brand right with their prototype store of that Mark.
Let's talk about the state of the yard facility, whether that's the express Carwash tunnel or whether that's a 5.6000 square foot C store with the U S are inside of it.
The opportunity is certainly there for.
C stores car washed create that brand recognition, which also has the loyalty.
Washington, the absence side of it.
We're out of it.
It becomes sort of that go to destination that the.
Consumers looking for right across to the.
Specific region or.
Trunk of the country. So.
Again, I think it's certainly repeatable, but I'm not going to put up.
Timeframe or at all.
All of them out behind but I think the opportunities.
Okay, 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 you know $9 million during the quarter.
In terms of dollar amount.
Which would see on.
Core gross invested basis, maybe a little bit kind of light versus kind of the in place portfolio today, but I know that can kind of be variable corner to corner, but should we kind of still expect maybe.
Maybe on the net debt to EBITDA is 5% range can be a good target effect for Fiat ex range of a good target going forward.
Yeah, John I think the ATM issuance itself is obviously a function of a number of different factors.
Our leverage metrics as you alluded to on liquidity at the time in terms of on balance sheet.
The stock price and an investment pipeline in all of the rest.
We're really focused on as I said in my prepared remarks.
On a train that we maintain strong liquidity access to capital that we keep low and moderate leverage and if you just go back to the end of 2020. We ended the year at I think it was just under 5 times on leverage the revolver was undrawn.
The Euro for was early January when we paid off the year end balance.
And as a result of some asset sales of legal settlement as Bill said a lot of cash on the balance sheet.
So if you go back to the chicken the end of the year Youll see that that fact.
Pattern and I think that that kind of lends itself.
2 of 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.
And we'll continue.
And we've seen it in the number of our peers due to utilize the <unk>. It's a great tool for our business Leverages right down the middle I think we've typically said 4 and a half the 5 and a half.
Maybe at different points in time, 5 to 6 times, but we're low to.
The middle end of that range.
And that's really what we're looking at as we as we execute on the ETF.
Thank you. Our next question comes from Joshua <unk> with Bank of America. Please proceed with your question.
Hey, good morning, everyone.
I guess I was just curious on maybe a impact on inflation on your portfolio.
Could you remind us maybe what percentage of your portfolios for.
Has escalators linked to.
To like the CPI or for specs, just trying to get a sense of when we could see an acceleration there.
As a result of more inflation.
Yes, sure it's Brian Josh.
1 fact, I'll start with is upwards of 90, 798% of our leases do have some escalator in them as of the bulk of the portfolio does have annual escalators of that.
Roughly 2 thirds is annual escalators.
And then the balance is your typical of the of 10% every 5 years or something thereabouts on the CPI basis, It's de Minimis, there might be 1 or 2 leases that's not the typical structure in our leases of at least today.
So the blend of all of that is about 1.6%.
Net annual.
I think it's a nice way to start off each year.
Obviously the growth in our.
In our earnings and our value creation will will be acquisition and redevelopment based.
As it is for for most of our space, but I think that you know going into a year with that level of of escalator is helpful.
And then the other thing I'll add given that the majority of our activity is sale leaseback activity, Yes, Mark and Chris said, we have and will continue to buy existing leases.
But at least when you're originating your your own leases in my humble opinion, it gives us at least some opportunity.
If the environment and the markets really.
Of the changing from from where it is and where it's been too.
Yeah.
At least have that conversation with tenants of perspective tenants about getting either different levels of different types of frequency of escalators in the leases so a little bit more control over our destiny. So to speak than if we were only acquiring existing leases.
Yes, the interest rate.
Have those conversations changed a lot in the last year or 2.
As far as like what you what you would want the noise.
I would think that you are talking specifically about escalators as more of the as Brian just mentioned, we strive for annuals.
First to get.
The increase if not something.
And certainly near term.
But.
Non of material change in the dynamic of those conversations.
Awesome, Thanks, guys I'll leave it there.
Okay.
Thank you ladies and gentlemen, we have reached the end.
And the answer session I will now turn the call over to Mr. Christopher constant for closing remark.
Great. Thank you operator, thank you everyone for participating on our call. This morning, we look forward to getting back on when we report our Q3 earnings on 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 and have a wonderful day.