Q4 2021 Getty Realty Corp Earnings Call
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Good morning, and welcome to the Getty Realty's earnings conference call for the fourth quarter 'twenty 'twenty. One 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 provided.
Formation about non-GAAP financial measures. Please go ahead Mr Dicker.
Thank you.
Excuse me 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 Getty Realty Dotcom certain statements made in the course of this call are not based on historical information and May concert.
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.
Samples are 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.
Is that could cause actual results to differ materially from those expressed or implied in the forward looking statements made today.
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 <unk>.
Tested funds from operations or a F F O 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 year end 2021, and highlight the company's investments and capital markets activities as usual.
Brian I'm prepared to take you through the portfolio and as a result.
As we enter 2021, we set a number of goals related to further diversifying and growing our portfolio.
Daily on our platform and create 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 in automotive retail properties during the year, including more than 64 million for the fourth.
It benefited from the continued strength of our in place portfolio from what she started with 100% of this year's grants.
Last year's coal price.
Our strong external growth contractual rent escalations and contributions from our completed redevelopment projects resulted in eight years.
Yes.
A 14% decrease adjusted funds from operations.
A 7% decrease.
Sure.
Our investment activity for the year reflects the a more diversified set of target asset classes, while maintaining our disciplined investment approach our.
Our strategy is to acquire high quality real estate across the convenience automotive retail sectors, and you're part of a strong and growing regional and national branded operators our investment spending in 2021 was the most diverse in the company's history.
Mired in a variety of high quality.
Store or walk auto service and drives from restaurant assets.
We also introduced several new tenants to our portfolio.
<unk> markets Mavis tires, refuel splash, Carwash, Valvoline, and Whitewater Express Carwash and.
We expanded our existing set of relationships with high quality operators, such as Dow Carwash Sipping soups car wash.
We are pleased by the success of our development funding program for beauty industry sites throughout the year and believe it complements both our core sale leaseback financing product and our ongoing redevelopment this year.
Having a flexible offerings allow us to support our tenants as they grow their businesses through acquisitions and development redevelopment it modernization.
Stores.
In addition rent commenced on two redevelopments with 711 for convenient store locations during the quarter, bringing our 2021 total to five completed projects since.
Since inception of the program, we have completed 24 projects and we maintain a solid pipeline of additional Redevelopments do you expect to come online over the next one to five years.
Our balance sheet ended 2021 in excellent shape.
We recast our revolving credit facility at more favorable terms of October we're at.
Active with our ATM throughout the fourth quarter, ending the year with leverage under five times EBITDA.
As further demonstration to our commitment.
Answering our company for the long term is supporting our growth initiatives.
As you know, we announced the issuance of $225 million of senior unsecured notes on investment.
And proactively refinance our notes maturing in 2023.
Most of this transaction our revolving credit facility is completely undrawn, we have addressed all debt maturities until 2025.
I want to reiterate our commitment to effectively executing for both new investments and the active asset management of our portfolio. We remain focused on acquiring high quality retail real estate occupied by National and regional operators. Our investment strategy continues to focus on automobile is the dominant form of consumer transportation.
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 through restaurants. These are the places where consumers are spending money in their cars and on their cars.
We'll 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 strong metropolitan markets across the country as.
As well 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 then we are in a position to continue driving additional shareholder value in 2022 and beyond.
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 1019 net lease properties.
Our active redevelopment sites.
Vacant properties.
Our weighted average lease term was eight eight years and our overall occupancy excluding active redevelopments remains constant at 99, 5%.
Our portfolio now spans 38 states across the country, plus Washington D C and our annualized base rents, 64% of which come from the top 50 Msas in the U S continue.
Continues to be well covered by our trailing 12 month tenant rent coverage ratio of two six times.
During 2021 Getty underwrote, a record $2 9 billion of opportunities to acquire freestanding convenience and automotive retail real estate.
Convenience stores represented approximately 60% of our underwriting with the remaining 40% being focused on these other automotive retail categories.
In terms of our investment activities, we had a very strong quarter, which we acquired are 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.
Initial cash yield of six 7%.
In addition, we ended the year with $5 7 million of funded construction loans for new to industry developments, which we're accruing interest at six 9%.
Ride more Colorado investment activity, we completed three transactions in the convenience and gas sector during the quarter.
I said activity in the CMG sector include.
Closing on the second tranche of our sale leaseback with flash markets a subsidiary of transit Energy group.
We acquired seven additional properties for $30 3 million of this tranche, which are located throughout the southeastern United States and a concentration around the Charlotte North Carolina MSA.
Completing the acquisition of our second development funding project refuel and the Charleston, South Carolina MSA, our total investment in the project, which was $5 5 million, including our final investment of one point million $1 1 million during the fourth quarter Asps.
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 simultaneously entering into a long term triple net lease.
And the car wash sector, we completed two transactions in the quarter, including acquiring our six newly constructed expressed on a car wash from Whitewater Express Carwash and Michigan for $3 6 million.
And acquiring two additional properties from Splash Carwash, which are located in New York and Vermont markets, our purchase price for the properties was $8 9 million.
And the auto service sector sector, we acquired seven properties during the quarter highlights include the acquisition of Amazes tire store into greater Chicago, MSA for $1 8 million and the acquisition of six Automotives excuse me automotive service sites in Chicago, and Kansas City, MSA for $8 2 million in the aggregate.
We also acquired one drive through quick serve restaurant in the Detroit MSA, one 9 million and advance once weight, one nine development funding with splash for our new to industry Carwash located in New Haven, Connecticut MSA.
As part of this transaction, we will accrue interest on our investments during the construction phase of a project and we expect to acquire the property 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 six 7%.
We began 2022 with a robust investment pipeline to support future growth and it is compromised of 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 subs.
Subsequent to quarter end, we acquired two convenience store properties and a new Haven, Connecticut, MSA from global partners for $7 million.
Moving to our development platform during the quarter, we invested approximately 300000 in both completed projects and sites, which remain in our pipeline.
In addition rent commencement two development projects during the quarter.
Both projects released 711 to new to industry convenience stores in Texas.
We invested 820000 NIS two 711 projects generated return on invested capital of approximately 26%.
For the year, we invested 1 million across our entire redevelopment platform and completed five redevelopment projects.
Completed projects require 1.3 million of total investment, which was spent over multiple years and will generate an aggregate 420000 of incremental rent to the carbon.
Looking ahead, we have seven signed leases or letters of intent, which includes four active projects to projects of property at properties, which are currently subject to triple net leases that have not.
Not yet been recaptured from the current tenants and one signed LOI.
LOI on a vacant property.
The company expects rents commence at several additional projects over the next one to three years.
Turning to our asset management activities for the fourth quarter, we sold 10 properties, realizing $13 7 million in gross proceeds and exited two leased properties for.
For the year, we sold 16 properties, realizing $24 5 million in gross proceeds and exited 11 leased properties.
Of the seven properties sold in the fourth quarter represented close to one tranche at play.
Planned divestiture of 21 sites to the existing tenant upstate New York.
Substance of course subsequent to quarter end, we sold the remaining sites for $10 1 million.
We will continue to slightly dispose the properties that we have determined are no longer.
Competitive.
Org format did not have compelling redevelopment potential.
With that I will turn the call over to Brian to discuss our financial results.
Thanks, Mark good morning, everyone.
Before I provide a recap of earnings I want to note that we've updated our definition of a F. F O to adjust for stock based compensation and amortization of debt issuance costs. This update was based on a comprehensive review of <unk> definitions across then that'd be sector and was done to improve the comparability of <unk> when evaluating our results alongside.
Our net lease peers are.
Our earnings release last night provided our results under both the updated our prior definitions my commentary. This morning will focus on our updated definition.
But that said, we reported <unk> per share a 54 cents for the fourth quarter, representing a year over year increase of 8% for the 50 cents per share reported in the fourth quarter of 2020.
<unk> was 47 cents per share for the fourth quarter of 2021.
For the full year 2021, <unk> per share was $2.08, representing a year over year increase of 7% versus $2 94 per share reported in 2020.
<unk> 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 six 1% and five 5% respectively.
Base rental income grew eight 7% to $35 6 million for the fourth quarter and eight 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 $800000 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 four 2% and a weighted average maturity of our debt was six five years.
Total indebtedness to total asset value was 34% based on the definitions in our credit agreements.
Total debt to total capitalization was 31% and net.
Debt to EBITDA was four six times.
These latter two metrics had 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 Anthro 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 345% and mature in February 2032.
$125 million of notes that will be funded in January 2023 bear interest at a fixed rate of 365% 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 of 5.35% unsecured notes that come due in June 2023.
And the balance will be used to fund investment activity.
Pro forma for Yesterdays closing, our weighted average debt maturity increases to seven 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 three 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.
For the year, we raised total gross proceeds of $94 $1 billion 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 500000 from the end of 2020 for.
For the quarter and year net environmental remediation spending was approximately $1 3 million at 4.4 million respectively.
Finally, we're introducing our 2022 assets <unk> 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 <unk> 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 $700000 of demolition cost 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.
Yeah.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please 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'd 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 keys, one moment, please while we poll for questions.
Our first question is from Brad Heffern with RBC capital markets. Please proceed with your question.
Hey, good morning, everyone. I was wondering if you could walk through the current pipeline and are a directional expectation for acquisition volumes in cap rate from 22.
Yes.
Also this is Chris I'll start and then Martin maybe address in more detail, but I think as we.
You've laid out.
A more diversified strategy, which you've seen in recent years is accelerating pace of investment activity or diversity.
Within the asset classes, how we're deploying that capital, where we're deploying that capital.
Those trends.
So our comment.
Current state of the pipeline yeah. So as we mentioned we had a record year coming out of last year opportunities that meet our initial underwriting criteria.
And coming out of last year going into this year through the first few months of the year, where we're ahead of the pace last year. This time as far as.
Active underwriting.
And as a result of the auto the efforts of our acquisition investment team but.
You're starting to see the.
The delivery of the entre into the car wash vertical two to three years ago.
Brought in or our investment criteria into other automotive verticals, approximately a year or so ago and we're starting to deliver on in those sectors.
We expect to continue to grow.
<unk>.
With regard to seeing opportunities that are out there and all of those verticals.
Creating as much opportunity as possible.
We feel confident to maintain our standards for qualifying real estate qualifying geographies market qualities had a balance sheet and an operation quality. So we don't have to deviate from our commitment to the.
The standards that are that we've delivered on in the past.
Okay got it thanks for that and then just on the cap rate front I mean, it seems like the your acquisition number has been pretty stable for the past few quarters is that consistent with what youre seeing in the market and then have you seen any sort of upward pressure.
You know on cap rates from from where rates have gone or are you maybe seeing anything out of the you know the competition that youre seeing.
Hum.
Although there's a few questions in there.
We certainly do not see any.
Spinning out of competition, there's a lot of capital chasing transactions.
The second answer which is we have not really seen cap rates respond to.
Tar costs or.
In general we.
Expect that to actually filter in but I think it's going to take six to nine months plus.
Given how much capital is chasing net lease retail assets.
Okay. Thank you.
Thank you. Our next question is from Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks, Good morning, just sticking with acquisitions, I guess and I'm thinking about the on the funding side. So Brian you know Getty ended 21, a little below the long term leverage target. It at 4.6 times. You mentioned, you know where do you expect leverage to be roughly at year end.
Are you planning to increase leverage from current levels as as you fund investments and redeploy the proceeds from from the dispositions.
Yeah. Good morning, Todd, Yes short answer there is.
Balance sheet leverage philosophy remains unchanged.
So obviously as we go through the year as you mentioned, we do have.
Serial amount of liquidity coming out of the recent capital raising but we're going to pursue the same St pass, we really have right. So as that activity investment activity drives capital needs right well work through our cash balances, we obviously have the revolver.
To continue to fund acquisitions and will utilize the ATM program as it's prudent and appropriate to do so.
In terms of year end leverage again, I would just say you know our range. The four five to five five times is still applicable.
The actual number will really be dependent on the underlying activity.
Okay and Yep appreciate the the change in in methodology, the reporting methodology around the new guidance.
For the.
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 'twenty one guidance just in order to improve you know.
Comparability as you transition to the new reporting methodology or at least provide a little bit of detail around those.
Those those line items, just to help us sort through it a bit here.
Yeah of course.
In 2021, it was about 11%.
Agate 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.
Yeah.
Okay, and then just a big bigger picture question.
I'm just curious if you could maybe talk a little bit about.
You know provide some insights perhaps around you know the impact that may be a shock and in gas prices you know.
It might have on on the gas segment here, you know in the near term and potentially and in the longer term if prices stay high for an extended period of time, just any insights just given the.
Fluid and in developing situation overseas.
So I'll do my best to answer that although it was pretty unprecedented what's happening.
My time here, but.
Rapid movements in wholesale prices, which is what we're seeing right now leads to a margin compression at the street level.
Positive forgetting right now are for our tenants.
We're starting from a very strong place.
Fuel margin.
On March 30 branches.
Pretty significantly above the historical average of.
Profitability per gallon.
As the prices moved up rapidly.
If you're an operator to probably.
Expect to see some margin compression.
The agenda.
Consumer has been absorbing that across the board.
Prices for everything, but I also this isn't isolated to the cost of gasoline in their daily lives.
Our tenants at this point have not seen any erosion to volume in fact, I think it's going the other way.
<unk>.
Virus.
So.
Multiple factors at play.
Precedent time, but that would be one.
That would leave you with that we're starting from a very strong place.
Sure.
Standpoint.
Fuel side of the business.
Okay do you think that this could potentially create any any added uncertainty.
In the transaction market either you know around you know gas stations, but also you know even car washes in other automotive if if you know sort of consumption is changing or or theres. Some potential behavioral changes you know if anything were to indoor for an extended period of time could could there be some.
Some hiccups in the in the transaction.
<unk> for for some of these segments at all.
Hum.
Gosh I really.
I really don't see this isn't it from a transaction market perspective.
Especially as you get away from the CMG portion of our business.
Mark I want to comment on that.
In my view.
Tenants are healthy.
And there's a significant amount of transaction.
Across our pipeline that is.
Certainly some of the CPG area, but in all of our other asset verticals as well.
I don't see any any impact on the ability to transact.
Sure.
Okay alright, thank you.
Thank you. Our next question is from Wes Golladay with Baird. Please proceed with your question.
Hey, Yeah. Good morning, guys 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 expense that was about 2 billion this quarter.
Yeah sure this is Brian .
In terms of G&A I think last year, we were around $20 million if you apply.
This environment.
Typical 45%.
That would get you to about $21 million feel like that's a good good number for the year.
And of that about $5 million again round numbers is stock based comp.
So hopefully that gives you some some guidance around that.
And in terms of environmental it was primarily around litigation accrual in the fourth quarter.
Yeah, Chris I don't know if you want to go into any more of that but it was a relatively nominal litigation accrual.
You know related to a potential settlement on one of our active.
Glen cases.
Yeah.
Okay.
Yeah.
Sorry go ahead sorry.
Okay, sorry about that 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 attendant coming to you, saying they wanted to buy it and if you could also kind of give us a little more color on where these at the bottom 10% of the portfolio bottom quartile, how should we think about the quality of these assets.
Yes.
No I wouldn't put these assets in a quartile.
As a portfolio that was all leased to one tenant properties.
Properties.
Our tenant was looking to invest in the properties to update and modernize the stores.
We were debating whether how we how we can structure that and ultimately.
Our tenant felt most comfortable putting the investment if you owned the properties and that led to a negotiation and we ultimately decided to exit.
Excellent.
I wouldn't characterize it up.
Bottom 10, but that's certainly properties that needed some some updating.
On the capital.
Got it and I believe you said that the pipeline was about 60 46 stores last year do you expect that to be the same this year and is there any segment, where you have the higher close rate of the volume that you're seeing.
I think we'd like to grow all sectors and continue to balance our balance the pipeline across all the verticals you know I think it's.
Sometimes it's a snapshot in time as the kind of the lumpiness of different opportunities present themselves to.
To us so many key is growing the top line pipeline give us the most opportunities of weekend.
Really good.
And our underwriting model.
The goal is to grow all sectors throughout the pipeline.
Got it thanks for the time.
Thank you as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
Our next question is from James Allen Dillard with Ladenburg Thalmann. Please proceed with your question.
Good morning, guys.
Alright, great.
Yes.
What's the drive through restaurant transaction, a one off deal or do you view <unk> as another growth vertical as you move forward.
Yeah. It certainly.
Fits with our broader.
Convenience automotive retail right. So as we think about our properties.
Characteristics that we like to buy.
We think those assets fit well with the portfolio.
Well with our themes on an inconvenience.
Consumer spending money, while they are out in their vehicles.
Oh, we have a number in our portfolio already. So this is just another transaction for us.
We certainly expect to continue to invest in that sector as well as our other verticals.
As we go forward.
Got it.
That's it for me.
For the answer.
Okay.
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.
The interests Getty and we look forward to getting back on with everybody at the end of April when we report our first quarter 2022 results.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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Mhm.
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Okay.
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Yeah.
Okay.
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Okay.
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Yeah.
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Thanks.
Uh huh.
Okay.