Q3 2021 Getty Realty Corp Earnings Call
Good morning, and welcome to Getty Realty's earnings conference call for the third quarter of 2021.
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 a safe Harbor statement and provide information about non-GAAP financial measures. Please go ahead Mr. Dicker.
Thank you operator, I would like to thank you all for joining us for Getty Realty's third quarter earnings Conference call Yesterday afternoon. The company released its financial results for the quarter ended September 32021, the form 8-K and earnings release are available in the Investor Relations section of our website at <unk>.
Eddie Realty Dotcom certain statements made in the course of this call are not made or 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 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 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, and 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 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 a F. F O and a 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 welcome to our earnings call for the third quarter of 2021.
With Josh and me on the call today are Mark Olear operating officer, Brian Dickman, our Chief Financial Officer.
I will lead off today's call by providing an overview of our performance for the third quarter of 2021 and highlight the company's investment and capital markets activities.
And then I will pass the call to Mark and Brian to discuss our portfolio and financial results in more detail.
The net result of our well positioned in place portfolio and the continued execution of our active and accretive investment program was at five 8% decrease in total revenues.
13, 2% increase in adjusted funds from operations and a six 4% decrease.
Sure.
The company benefited from the stability of its portfolio of convenience automotive retail assets, which continued to perform well means that we had another quarter of full rent collections all amounts owed to us as a result of our 2020 COVID-19 related to <unk>.
Firms.
The success of our investment strategies year to date has been a key contributor contributor to our earnings growth, we invested $61 1 million 25 properties during the quarter and another $8 8 million just after quarter end.
Our year to date total investment activity to more than $144 million.
This accelerated pace of investment activity was highlighted by our ability to create new high quality tenants.
Including slack markets with sites located across the southeastern U S.
Splash carwash footprint spans the northeast.
We also continued to successfully execute on our multiple investment strategies.
Leasebacks accretive acquisitions net leased properties and development funding.
Yes.
In addition rent commenced on three redevelopment projects in the quarter, including our second and third projects with 711, Remodels Geolocation, Baltimore and Dallas Fort worth.
Bringing our completed projects to 'twenty two since the inception of our redevelopment program.
Okay.
We also announced yesterday that we successfully amended and extended our credit agreement, which now will mature in October 2025 improved.
Terms of our facility further validate the company's platform strong performance over the last four years.
When combined with our active ATM program, which we've used to raise more than $50 million. This year and our strong balance sheet. We continue to have access to capital and the right credit profiles.
Yes.
Given our performance year to date I am pleased that our board approved an increase of five 1% a recurring quarterly dividend 41 cents per share.
This represents eight straight year the dividend.
Our board believes this annual increase.
That maintains a stable payout ratio and is tied to the company's growth over the past year.
Furthermore, we are again pleased that our year to date accretive investment activity has positioned the company raised its 2021.
Sure.
I want to reiterate our commitment to effectively executing on both new investment activity in the active asset management of our portfolio.
Our teams continue to work diligently to source and underwrite new opportunities to invest across our target asset classes each source carwash automotive.
Sell properties.
In strong metropolitan markets across the country.
As well as to unlock embedded value through selective redevelopments.
We believe our success year to date demonstrates our ability to source opportunities.
Aligned with our investment strategies and that will continue to drive additional shareholder value.
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 the third quarter.
<unk> includes 1011.
Net lease properties five active redevelopment sites and five vacant properties.
Our weighted average lease term was approximately eight eight years overall occupancy excluding active redevelopments remains constant at 99, 5%.
Our portfolio spans 36 states across the country, plus Washington D C.
Annualized base rents, 63% of which come from the top 50 Msas in the U S.
And to be well covered by our trailing 12 month tenant rent coverage ratio too.
$6.
In terms of our investment activities, we had a highly successful quarter in which we invested $61 1 million and 25 properties.
Sequent to the quarter end, we acquired two additional properties for $8 8 million, bringing our year to date investment activity to $144 5 million plus 82 properties.
We completed two transactions in the convenience and gas sector during the quarter.
First was the 15 property sale leaseback with flash market subsidiary of Transit Energy group.
In this transaction, we invested 31 $35 1 million to acquire the properties, which are located throughout the southeastern United States with a concentration around the Raleigh Durham, North Carolina MSA.
Properties acquired have an average store size 3600 square feet and an average property size one seven acres.
In addition, 50, 53% of the property properties have sub tenancies with either quick serve restaurants auto service operators.
We also completed our first development funding project with refuel into Charleston, South Carolina MSA.
Total investment in the project was $4 5 million, including our final investment of $1 1 million during the third quarter.
As per the terms of our development funding transactions, we acquired the property upon completion of development in conjunction with our final funding payment and <unk>.
Simultaneously entered into a long term triple net lease.
In the car wash sector, we completed three transactions in the quarter, we acquired two newly constructed properties from Whitewater Express Carwash and Michigan for 7 million. These properties were added to our existing unitary lease with Whitewater. We also acquired two additional properties for an aggregate purchase price of 8 million.
Which or at least the go car wash in San Antonio, Texas, and Las Vegas, Nevada Msas.
Additionally, we acquired our first property was flat slash Carwash, which is located in new Haven, Connecticut MSA.
Our purchase price was $4 million for the property.
And the auto service sector, we acquired our first maybe just higher property, we invested $4 6 million to acquire the properties in the Chicago, Illinois MSA.
Getty also advanced $1.2 million of development funding three new to industry convenience stores with retool, the Charleston, South Carolina MSA.
The total amount funded by getting for these projects to $8 9 million at quarter end.
As far as this transaction, we will accrue interest on our investments during the construction phase of the project and we will expect to acquire the properties via sale leaseback transactions upon completion and final funding.
The weighted average initial lease term of our completed transactions for the quarter was $14 six years and our aggregate initial cash yield on our third quarter acquisitions was six 7%.
Subsequent to quarter end, we acquired two properties in the Burlington, Vermont, MSA Splash Carwash purchase price was $8 8 million and the cap rate was consistent with our year to date acquisition activity.
We ended the quarter with a strong investment pipeline to remain highly committed to continuing to grow our portfolio of convenience and automotive retail real estate.
Expect to pursue that growth through continued sourcing of direct sale leaseback acquisitions of net lease properties and development funding for new to industry assets.
Moving to our redevelopment platform during the quarter, we invested approximately 331000 and both completed projects and sites, which remain in our pipeline.
In addition rent commenced on three redevelopment projects during the quarter, including two 711 Canadian stores and one property leased to Bj's wholesale club, which is adjacent to integrate newly constructed superstores.
In aggregate, we invested $5 million in these three projects and generate a return on investment capital of 43%.
At quarter end, we had eight signed leases or letters of intent, which includes five active projects and three projects and properties, which are currently subject to triple net leases and have not yet been recaptured from the current tenants.
The company expense expects rent to commence at two addition redevelopment development sites during the fourth quarter of 2021.
In total we have invested approximately $1 9 million and eight redevelopment projects in our pipeline and estimate that these projects required a total investment by Getty of $7 4 million.
We project. These redevelopments will generate incremental returns to the company in excess of where we could invest these funds in the acquisition market today.
Turning to our asset management activities for the quarter, we sold one property during the quarter, realizing $2 3 million in gross proceeds exited five lease properties.
We expect the total net impact of these activities will have de minimis impact on our financial results.
As we look ahead, we will continue to selectively dispose the properties that we've determined are no longer competitive.
Thanks for that do not have compelling redevelopment potential.
With that I'll turn the call over to Brian discuss our financial results.
Thanks, Mark good morning, everyone.
Let me start with a recap of earnings <unk>, which we believe best reflects the Companys core operating performance was <unk> 50 per share for the third quarter, representing a year over year increase six 4%.
<unk> was <unk> 48 per share for the quarter.
Our total revenues were $40 1 million, representing a year over year increase of five 8%.
Rental income, which excludes tenant reimbursements and interest on notes mortgages receivables grew seven 5% to $34 3 million.
Strong acquisition activity over the last 12 months and recurring rent escalators in our leases for the primary drivers of the increase with additional contribution from rent Commencements are completed redevelopment projects.
On the expense side G&A costs increase in the quarter, primarily due to employee related expenses, including noncash stock based compensation property costs decreased marginally due to reductions in real estate tax expense and environmental expenses, which are highly variable due to a number of estimates and noncash adjustments increased.
In the quarter due to certain legal fees and changes in net remediation cost estimates.
If we turn to the balance sheet and our capital markets activities. We ended the quarter with $567 5 million of total debt outstanding.
$525 million of long term fixed rate unsecured notes and $42 5 million outstanding on our $300 million revolving credit facility.
Our weighted average borrowing cost was 4% and a weighted average maturity of our debt was six three years. In addition, our total debt to total market capitalization was 29% our total debt to total asset value was 37% and our net debt to EBITDA was $5. One times each of these leverage metrics are calculated according to the.
Definitions and our loan agreements.
As Chris mentioned yesterday, we announced the amendment and extension of our $300 million revolving credit facility, which is now set to mature in October 2025, with two six month extensions.
Where we have the option to extend to October of 2026.
In addition to extending the term we were able to reduce the interest rate by 20% to 50 basis points, depending on where we are in the leverage based pricing grid and amend certain covenant provisions to align with those generally applicable to investment grade rated Reits.
We also amended each of our outstanding unsecured notes to conform to the new credit facility Covenant provisions.
All in all this was a good transaction forgetting we've reduced our cost of capital improves in terms and importantly demonstrated the continued support of our bank group and unsecured note holders.
With the credit facility extended our nearest debt maturity is now the $75 million of senior unsecured notes that come due in June of 2023.
Moving to ATM activity, we continue to be selective with our equity issuance during the quarter raising $19 8 million an average price of $31 12 per share year to date, we've raised a total of $50 $1 million through the ATM.
We think about our future capital needs more broadly we remain committed to maintaining a strong credit profile with meaningful liquidity and access to capital low to moderate leverage and a well ladder and flexible balance sheet.
With respect to our environmental liability we ended the quarter at $47 8 million, which was a decrease of approximately 300000 from the end of 2020 for the quarter net environmental remediation spending was approximately $1 3 million.
And finally, as a result of our investment and capital markets activities in the first nine months of the year, we're raising our $2021 <unk> per share guidance to a range of $1 93 to $1 94 from a previous range of $1 89 to $1 91.
Our guidance includes transit transaction activity completed year to date, but just not otherwise assumed potential acquisitions or capital markets activities for the remainder of 2021.
Factors, which may impact our guidance include variability with respect to certain operating costs and our expectation and we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses, including certain property demolition costs and transaction costs for deals that are ultimately not completed.
And with that I'll ask the operator to open the call for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
You'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Brad Heffern with RBC. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the questions.
On the acquisition front I was just wondering if you could talk for health deal flow looks right. Now obviously, the 61 million number was pretty robust sudden do you think that that's sustainable.
Tenable run rate number or how are you doing that.
Yeah. This is mark I can comment on our pipeline as I mentioned in the comments is very healthy we're very happy with where it is.
Flow of opportunities, we're seeing and.
Laurent full underwriting is ahead of where it was this time last year. So we continue to grow.
Our opportunity sets in our relationships and all the retail verticals that we've now expanded it to so.
Say that we're pretty happy.
And we look forward to reporting on more as we go forward.
Okay and then.
I appreciate the increased disclosure on the escalators I was curious for the CPI linked escalators.
It does have caps and then you know the.
The escalator guidance ticked up by 10 basis points as part of the reason that CPI linkage or any color you can give on that.
Yeah, Hey, Brian it's Brian the CPI, it's a small number of leases one of them just happens to be somewhat material dollar amount.
Not the.
Typical escalator clauses in the leases, but they do have a flu.
Floors and ceilings. So they are collared, which is pretty typical.
When you have that structure.
In terms of the tick up from the one six to the one seven.
We did have.
The <unk>.
Flash market deal the transit deal that has 2% annual escalators, so thats probably the difference there again on the route.
For the most part I think what we're seeing in our appreciation and the deals. We are closing are the structures that are in line with the majority of our of our deals which are annual escalators.
The 2% range.
Okay. Thank you.
Our next question comes from the line of Lucy Deutsche <unk> with Bank of America. Please proceed with your question.
Hi, good morning, everybody.
On for Josh Centerline.
Just curious could you guys can comment on any specific opportunity.
Accelerate redevelopment plan for 2020 tail.
So we have a constant effort to deliver with the returns that we've reported deliver.
As higher volume and as fast paced as possible and redevelopment program there are certain barriers to outgrowing.
Growing at materially from where we are today with respect to extracting properties releases. The marketing efforts. The entitlement efforts are always a challenge to typical development hurdles that you experienced in <unk>.
Project through permitting and.
And construction so.
I think right now the pace Rod is about what we see.
Again, we kind of a constant effort by the asset management team to call opportunities out of the portfolio, but there are certain restrictions and obstacles to significant growth of that pace.
Okay and my second question.
And how many of your C store tenant.
King.
All right.
Working to capitalize on that trend.
Do you guys have any more insight into that.
I'm kind of anymore.
Uh huh.
A hot topic.
Yeah, Yeah, I think it's been a hot topic for several years now with.
With our operators who are on the ground.
There are certain operators are evaluating <unk>.
Adding charging stations at their properties.
Caution everyone that stock charges fished, each and every property that certain properties.
Blend themselves more towards longer commutes or longer driving times.
Station really fits well.
But the.
No.
The goal for our operators to drive traffic not only to their locations for fueling or for charging for.
Four.
Convenience store items food beverages.
<unk> seen sort of a concerted effort by tenants right.
We've talked about this in the past to membership programs or loyalty programs to drive traffic.
Tuna location, whether again, it's charging our gas.
Adding a car wash on site.
Most importantly, the food in the convenience store items within the store I.
I think what you can expect and ensures that youll start to see our operators right.
Sure.
Sure.
Great. Thank you.
Yeah.
Our next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks. Good morning, just first question on the investments completed in the quarter sorry, if I missed this but can you just discuss the the cap rate or the initial yields on those investments and can you discuss.
Sort of the environment in general around pricing you know the competition that youre seeing and whether you're starting to see any.
In a reduction in in yields or cap rate compression as you move forward with future investments.
So the market has been active in the verticals that we're targeting certainly.
It is attractive.
Set of retail operations.
Cap rates compressing kind of coming out of last year and it.
Certainly in through this year.
We continue to acquire in that range of.
Mid six to seven.
This is the market for the product we're looking at.
It's <unk>.
It's active we feel are competitive I'm not sure what direct the run rate will be here over the next few quarters of continued compression but.
I think we're priced export.
Yes buying some.
Okay. That's helpful. And then I just wanted to follow up on the rent escalators across the portfolio. So you you commented Brian on the you know the.
The increase to one seven from 1.6 talked about flash market deal and some other deals are closing.
Well, we'll CPI increases do you expect CPI increases to have any impact on that 1.7% annual rent escalation in the near term I mean do you do you expect to see that improve as we move into 'twenty two from from that current annual rate.
I don't think you'd see anything material there.
What should we use the floor right.
The collars on the on the CPI is in our in our calculation.
And it's an every three year reset as again, we're talking about our portfolio is really a handful of leases just one of them happens to be a larger unitary lease.
And it's an every three year reset and it's got the floor and it's got the ceiling. So no I don't expect that to have any significant impact on our operations here as we sit here today.
Okay got it and then.
Just in terms of the balance sheet and funding investments as we move ahead here. You've obviously, obviously you know you utilize the ATM a little bit.
Leverage ticked up just slightly 5.1 times debt to EBITDA from five times last quarter can you just remind us what the long term target leverage level is for the company and sort of where you see that trending in the near term.
Yes, I think we're in a really good position when it comes to capital just generally speaking there is a significant capacity on the revolver.
<unk> headroom within leverage we've typically.
In the four five to five five times, allowing for opportunities to maybe tick up a little bit above that into the higher fives. If it was appropriate so sitting where we are at five times five one.
Again significant headroom there and then you know capital markets are broadly constructive. So I think we're in a place where you'll see us execute as we have been we will utilize the revolver will utilized ATM and if theres an opportunity or a need.
Specifically, you know in the CPG space Carwash space and as we expand it to other asset classes.
Long term relationships.
Hope to do with as we broaden our Augusta.
So it sounds like it was kind of smaller M&A I mean is that something youre seeing accelerate or continue as we can.
Kind of look forward into <unk>, maybe even 2022.
Well I think just the asset classes that we are targeting Chi Chi Carwash auto service those are asset classes that we've been saying our I've been consolidating for a number of years now and.
Again. This is this has served us well.
If we do well right it is.
Partnering with operators, who are growing and taking market share right, becoming a dominant presence within their region or nationally.
No establish a long term partnership and we hope to do more with all of these types of tenants over time as they grow their businesses.
But maybe I can remember and maybe this is pre pandemic. It felt like you know pricing was getting kind of lofty and maybe slowing down some of that M&A.
And kind of tenants and potential tenants and has that been accelerating over the last couple of quarters.
I think the pricing.
Specifically on the very large transactions breakfast was where we saw some pretty high multiples again, just talking about the.
Operating businesses.
M&A context.
You know again.
My comment on their deals specific.
There are opportunities were.
Okay required.
There are direct.
In a market or enter adjacent market.
Do it.
Unattractive prices.
You gain scale, specifically M. C. G carwash right and there are certain synergies that are that are able to be realized.
Pretty short order and that certainly helps from operators pricing on the M&A side.
Okay.
And then bigger picture.
You know as you kind of look back at how the portfolio your portfolio has performed.
Historically.
During periods of kind of rising gas prices.
As we kind of see gas prices kind of moving upward and is that going to have any impact you think potentially on tenant credit just.
If there is some kind of pressure on visitation and I know they can kind of passed a lot of that pricing on to consumers but.
Historically has there been any kind of impact on how tenants performed during periods of rising gas prices.
Yeah, certainly rapid movements.
In wholesale pricing that's been a historically a declining retail margin environment.
We have a slide actually in our in our Investor presentation, which goes through kind of it.
The change in.
Retail margins over the last several years.
I think one thing you are seeing just there.
There has been a steady shift upwards in retail.
Fuel margins over the last several years and if you think about.
Pricing and demand for fuel, we expect that trend to continue.
Stabilized there at a higher level I'm not trying to call a specific cents per gallon margin, but just at a higher level.
On a permanent basis, I think that's going to help our tenants pass along a lot of the higher cost to the consumer.
Okay.
That's it for me. Thank you very much for the question.
Our next question comes from the line of Ross Wes Golladay with Robert W. Baird. Please proceed with your question.
Hey, Good morning, guys can you talk about how the composition of the pipeline is changing is it more driven by new relationships maybe versus a few years ago, and then obviously, making some progress on the car washes, but you did do a tire store deal. This quarter. So is that becoming a bigger part of the pipeline as well.
So yeah. If you look back where we were a couple of years back we were kind of Flatfooted startup carwash and we grew that to a.
No material part of our pipeline.
The pipeline is still weighted towards gas convenience.
Operators.
That said, it's you know it's growing so both sides of that equation of growing we started to make similar progress in inroads in the other verticals that we targeted specifically tire lube centers time of battery and also parts of auto service. So I think we should be we plan or you should expect.
B groh, all those pieces of the pie.
At different paces, but grow certainly over the next couple of years.
<unk>.
I think that many of our deals.
Two question on sourcing or composition it's.
It's through the efforts of our investment acquisitions acquisition team to both.
Growth, where its appropriate existing relationships relationships with our stronger tenants.
And also to create new opportunities for not only geographic with tenant and category diversity.
Amongst the portfolio and I think we're kind of executing on all fronts there.
And I guess, when we look at timing to build these relationships and you actually get into that for that to translate into deal volume is that a multi year process, where is it a linear growth or does it grow exponential maybe a few years later.
[laughter].
So.
Listen I think it's we're looking for long term relationships with strong operators and as their as their businesses grow and they enable us to acquire.
Everyone's looking for to take the Lumpiness out of all of their programs, but there are ebbs and flows with all of our tenant relationships and in the pipeline.
<unk>.
We just constantly manage those relationships do ready to be.
Our funding partner when appropriate.
Some of these are.
Deals that come in come up quickly and there's a gap between the next deal some are pretty steady state. So the combination of all those relationship management pipeline management kind of fuels program.
On an ongoing basis.
Okay, and then you Didnt mentioned selling some noncore assets, but I guess would you also be open to selling assets are opportunistically looking at the I think you delivered two seven elevens this quarter and they have a pretty strong bid in the private market.
Yeah.
Typically we've been especially with our new new developments.
Buy and hold investors. If you look at what we've been selling right, it's been kind of underperforming assets across the portfolio.
Just holistically.
We look at sort of ballpark.
<unk>.
But again I wouldn't guide you towards expecting significant asset sales.
You know what we just shared core holdings.
Okay. Thanks, Thanks, guys.
Yeah.
Yeah.
As a reminder, it is star one to ask a question.
Yeah.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Thank you operator, and thank you everyone for joining us this morning for our third quarter call. We look forward to the.
Any background, everyone I think in late February when we close out our fourth quarter and fiscal year 2021, and we appreciate your interest in the company.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.
Yeah.
Okay.