Q4 2022 Getty Realty Corp Earnings Call
Good morning, and welcome to Getty Realty's earnings conference call for the fourth quarter of 2020 two.
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 fourth quarter and year end earnings Conference call yesterday afternoon. The company released its financial results for the quarter and year ended December 31, 2020 to the form 8-K and earnings release are available in the Investor Relations Sir.
<unk> of our website at Getty Realty Dotcom 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.
Those described in the forward looking statements. Examples of forward looking statements include our 2023 guidance and May also include statements made by management in their remarks and in response to questions, including regarding the company's future company operations future financial performance and the company's acquisition or redevelopment plans and op.
<unk>, 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 Companys annual report on Form 10-K for the year for the year ended December 31, 2021, and our subsequent filings made with the SEC for a more detailed discussion.
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 and 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 <unk> and our reconciliation of those measures to net earnings with that let me turn the call over to Christopher constant our chief executive.
The officer.
Thank you Josh good morning, everyone and welcome to our earnings call for the fourth quarter and full year 2022.
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 financial results and investment activities for both the fourth quarter and the full year ended December 31.
I will also discuss the company's strong position heading into 2023 and as usual Mark will then take you through our portfolio and Brian will further discuss our financial results and guidance.
2022 was a unique but successful year for Getty Realty, our financial results exceeded the high end of our guidance range and we continue to make progress towards two of our other key objectives, which are to grow and further diversify our portfolio.
Beyond being proud of our overall accomplishments I am, particularly pleased that the team at Getty remained disciplined throughout the year as we worked through a volatile capital markets and the transaction market that was slow to adapt.
That patients was rewarded as we ended the year with a very active and successful fourth quarter.
For the year and quarter, our base rental income grew 6% and seven 5%, respectively, and our adjusted funds from operations or <unk> per share increased one 9% to 9% respectively.
For the year, we invested $1 57, a $157 5 million and 52 properties, including more than $83 million in the fourth quarter.
Our investments in 2020 to reflect our continued emphasis on diversifying our portfolio by property type geography, and tenant as we leverage our expertise to invest in high quality real estate across convenience in automotive retail sectors.
In 2022 more than 70% of our investments were in property types other than convenience stores.
<unk> Express car washes auto service centers and drive through quick service restaurants.
We also expanded our presence in a number of attractive high growth metro areas, including Austin, Charleston, Charlotte, Las Vegas, and San Antonio and continued to expand our tenant roster through both our acquisitions and redevelopment programs.
In 2022, we increased our activity with refuel high growth C store, operator, and go car wash and splash Carwash two of the best and largest operators in the business and we look forward to continue to expand with these brands in 2023.
We also completed redevelopment projects throughout the year and added Chase Bank and Murphy USA as tenants by completing value add projects and the Boston Dallas Fort Worth MSA.
As we look ahead, we are excited about our committed investment pipeline of more than $110 million for the acquisition and development of new to industry convenience stores auto centers and car wash properties, which we expect to fund over the next approximately 12 months.
Equally important our proactive capital raising activities in 2022 will enable us to accretively funded these transactions, while maintaining our conservative leverage profile.
Supported by our strong financial position, our team continues to underwrite opportunities across our target asset classes.
Our disciplined strategy continues to emphasize owning high quality real estate in major metro areas at partnering with growing regional and national operators across the convenience in automotive retail sectors.
Our knowledge of these sectors in which we invest our underwriting expertise and our deep industry relationships continue to drive an increasing set of transaction opportunities forget it.
To these points, we are confident in our ability to continue executing on our investment strategy and to grow and further diversify our portfolio.
Lastly, I want to thank the dedicated team at <unk> for their outstanding efforts in 2022 and their enthusiasm to start 2023.
I believe we are poised for continued success due to this experienced team our solid balance sheet and our differentiated investment strategy.
Our focus on providing real estate financing solutions to the convenience in automotive retail sectors combined with our funded investment pipeline and this has positioned.
Positions us well for success in 2023 and beyond.
With that I will turn the call over to Mark to discuss our portfolio and investment activities.
Thank you, Chris and so at the end of the year. Our occupied portfolio included 1034 net lease properties three active redevelopment sites.
Our weighted average lease term was eight eight years and our overall occupancy excluding active redevelopments increased to 99, 8%.
Our portfolio spans 38 states, plus Washington, DC with 65% of our annualized base rent coming from top 50, Msas and 83% coming from top 100 Msas.
Our our rents are well covered with a trailing 12 month tenant rent coverage coverage ratio of two seven times.
We have invested in our platform to accelerate our growth and we are starting to see returns on these investments in our people processes.
In systems as we experienced a significant increase in the volume and diversity of potential transactions that we underwrote in 2022.
For the year, we evaluated a record $6 4 billion of opportunities to acquire freestanding convenience automotive retail real estate.
You mean stores represented approximately 58% of our underwriting with the remaining 42% being focused on other convenience and automotive retail property types.
In terms of our investment activities, we had a very strong quarter in which we acquired will provide development funding for 36 properties totaling totaling $83 3 million.
Bringing our full year total to 52 properties and $157 5 million.
Highlights of this quarter's investments include the acquisition of six convenience stores located in Las Vegas, MSA for $35 7 million.
<unk> Auto service centers located primarily in the Charlotte MSA for $21 2 million.
The car wash properties located in Austin, Las Vegas, and San Antonio Msas for $12 4 million.
And one drive thru <unk> located in the Charlotte MSA for $3 million.
In addition, we provide approximately $9 3 million.
Including accrued interest for the development of 12, new to industry properties, including convenience stores in Charleston in Austin Msas.
And car wash properties in the Jacksonville, New Haven, Newberg, Raleigh enrichment Msas.
As part of these funding transactions, we will accrue interest on our investments during the construction phase of the project and.
And we will acquire the properties via sale leaseback.
Completion and final funding.
For the fourth quarter the aggregate initial cash yield on our investment activity was approximately six 9% and a weighted average lease term for acquired properties was $17 three years.
For the year ended 2022, we acquired 40 properties for 137 million and weighted average initial lease term of $16. Two years, an aggregate initial cash yield of approximately six 8%.
In addition, we advanced $22 million and construction loans for new to industry developments, which are occurring issued interest at six 9%.
Subsequent to year end, we invested $5 6 million for the development and acquisition of six Carwash properties located in various markets across the U S.
Looking ahead regarding the $110 million of commitments to fund acquisitions and developments that Chris referenced we expect to fund these transactions throughout the next approximate 12 months an average initial yield initial yields of between 10% and 20 basis points in excess of where we closed acquisitions in 2022.
We continue to evaluate underwrite a variety of potential investment opportunities across our target asset classes.
Pricing for retail properties is moving and we believe the market continues to adjust to reflect the changing economic landscape in tighter credit markets.
We are pleased that we are sourcing the vast majority of these activities of our broad network and we believe we are well positioned to invest accretively as we move through 2023.
Moving to our redevelopment platform during the quarter, we invested approximately 140000 and projects which are in various stages in our pipeline.
We completed one redevelopment project, where rent commenced on a new convenience store in the Dallas Fort worth MSA, which is leased to Murphy USA.
We invested.
100000 in this project and generate a return on invested capital of 28%.
We ended the quarter with six signed leases, which includes three active projects and three projects at properties that are currently subject to triple net leases and have not yet been recaptured from the current tenants.
The company expects rents to commence at these and other projects over the next couple of years, including in 2023.
Turning to our asset management activities for the fourth quarter, we sold five properties, realizing $30 million gross proceeds and exited one lease property.
For the year, we sold 24 properties, realizing $26 million in gross proceeds and exited five leased properties. We will continue to pursue dispositions of non core properties that we have determined are no longer competitive in their current format do not have compelling redevelopment potential for which we believe have attractive valuation.
That may allow us to recycle capital as party part of managing our balance sheet and sources of capital.
With that I'll turn the call over to Brian discusses our financial results.
Thanks, Mark good morning, everyone.
Last night, we reported <unk> per share of <unk> 55 for Q4 2022, representing an increase of one 9% versus <unk> 54 per share we reported in Q4 2021.
<unk> net income for the fourth quarter were <unk> 63, and 57 per share respectively.
For the full year 2022, <unk> per share was $2 14.
Representing an increase of two 9% versus the 2008 <unk> per share was recorded in 2021.
<unk> net income for 2022 or 2040 <unk>.
And $1 88 per share respectively.
Our total revenues were $43 1 million for the fourth quarter and $165 6 million for the year representing year over year growth of nine 6% at six 6% respectively.
Base rental income, which excludes tenant reimbursements GAAP revenue adjustments and any additional rent grew 6% to $37 8 million fourth quarter, and seven 5% to $147 8 million in 2022.
Sean 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 are completed redevelopment projects.
On the expense side G&A costs increased seven 5% to $5 2 million in the fourth quarter and only two 3% to $26 million for the year as we were able to manage overhead relatively well during 2020 to incur.
Increased G&A is being driven primarily by employee related expenses, including stock based compensation.
Property costs increased in the fourth quarter, primarily due to increases in reimbursable expenses for taxes and other municipal charges.
Pretty cost decrease for the full year due to lower rent expense and non reimbursable expenses as we continue to exit lease sites and sell or redevelop other legacy properties. This.
This decrease was partially offset by higher costs associated with our redevelopment program, specifically increased demolition cost per active projects, which runs through property costs on our P&L.
Environmental expenses, which are highly variable due to a number of estimates and noncash adjustments declined to a credit of $5 5 million for the quarter and a credit of $20 9 million for the year.
The reduction in both periods versus 2021 was primarily due to our estimates related to unknown environmental liabilities specifically.
Specifically during the quarter and year. We concluded that there was no material continued risk of having to satisfy obligations relating to preexisting unknown environmental contamination at certain properties and accordingly, we removed $6 $4 million and $23 5 million, respectively of unknown reserve liabilities, which had.
Previously been accrued for these properties.
Turning to the balance sheet and our capital markets activities. We ended the year with $695 million of total debt outstanding consisting primarily of $625 million of senior unsecured notes with a weighted average interest rate of four 1% and a weighted average maturity of six one years, we also have $70 million borrowed under our revolving.
Credit facility at year end.
As of December 31, net debt to EBITDA was five one times and total debt to total capitalization was 31% while total indebtedness to total asset value calculated pursuant to our credit agreement was 38%.
Taking into account unsettled forward equity of approximately $115 million that debt to EBITDA was four two times at the end of the year.
Subsequent to quarter end, we closed on our previously announced unsecured notes offering raising $125 million at 365% and maturing in January 2033, we.
We used the proceeds to.
Repay in full $75 million of unsecured notes maturing in June of this year and to reduce amounts outstanding on our revolving credit facility.
Pro forma for this transaction, we had $675 million of senior unsecured notes outstanding with a weighted average interest rate of three 9% and a weighted average maturity of approximately seven five years.
Moving to our ATM program during the quarter, we entered into forward sale agreements to sell 3 million shares which will generate anticipated gross proceeds of $96 1 million for.
For the year, we entered into forward sale agreements to sell $3 7 million shares for anticipated gross proceeds of $117 6 million.
Dave No share subject to forward sale agreements have been settled.
Returning to our $110 million committed investment pipeline just want to emphasize that these transactions are fully funded through our unsettled forward equity agreements and we have additional liquidity beyond that from certain assets that are under contract for sale cash in 2031 proceeds on our balance sheet and our revolving credit facility.
Pro forma for this investment and capital activity, we expect our balance sheets remain well positioned to support continued growth.
Leverage is expected to remain in line with our target range of four five to five five times net debt to EBITDA and we expect to maintain ample capacity under our revolver.
As our investment pipeline evolves, we will continue to evaluate all capital sources to ensure that we're funding transactions in an accretive manner, while maintaining our investment grade.
Profile.
With respect to our environmental liability.
<unk> ended the year at $23 2 million, which was a reduction of $24 4 million from the end of 2021.
The primary driver of the improvement was the removal of $23 5 million unknown reserve liabilities as discussed earlier.
As a reminder, these reserves were related to legacy properties, where we retain the responsibility to cleanup preexisting unknown environmental contamination that was discovered during that I look back period, which expired during 2022.
We concluded that there was no material continued risk of having to satisfy contractual obligations at these properties and accordingly remove the unknown reserve liabilities, which had previously been accrued.
Our net environmental remediation spending in the fourth quarter was approximately $1 $1 million and for the full year. It was approximately $4 3 million.
Lastly, we are reaffirming our 2023 <unk> guidance of $2 19 to $2 21 per share, which we introduced earlier this year.
As a reminder, our outlook includes transaction activity to date, but does not otherwise assume any potential acquisitions dispositions or capital markets activities for the remainder of 2023 spin.
Specific factors, which continue to impact our <unk> guidance. This year include variability with respect to certain operating expenses and deal pursuit cost at approximately $400000 of anticipated demolition costs, our redevelopment projects, which cost run through our P&L.
With that I'll ask the operator to open the call for questions.
Okay.
Okay.
Thank you.
We will now be conducting a question and answer session.
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.
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 keys.
One moment please poll for questions.
Yes.
We have a first question from the line of Brad Heffern with RBC capital markets. Please go ahead.
Hey, everybody good morning.
So the development funding pipeline, obviously expanded significantly last year and it seems like you've been able to keep that at a relatively consistent level. Since then I'm curious if that's the way that you expect the business to run from here on out or is it really just the environment that we're in where construction loan availability isn't there and the <unk>.
Traditional way.
Yes, I think going forward, we expect to see a mix of what I'll call traditional sale leaseback, which was the company's core product.
Along with development funding, we view it as two two products to offer tenants or potential partners.
Who are looking at how they grow their businesses. So they're looking at acquisitions sale leaseback works there.
Welcome to growth for new store development, we have a product that can help them facilitate that as well so really we view it as two two lines of investment activity forget it we expect that to continue.
Okay got it.
And then Brian just a clarification on the guidance.
I know you typically don't include things that haven't closed yet, but I am curious for like the $110 million pipeline I would assume some of that is.
Under contract or at least firmed up unlike the development funding fine. It just hasnt been funded yet so I'm curious like is any of that $110 million in the guidance or is it all excluded.
Yeah. Thanks, Brad So just to be clear when we talk about our investment pipeline that is all under contract.
We do have other deals under LOI pending LOI shadow pipeline and all the rest of the activity so that is under contract.
<unk>.
Really just to be consistent with how we've historically provided guidance. We do not include any of that in the guidance, we put forth. So none of the under contract activity nor do we include any SaaS settlement of forward equity said, we've tried to be very consistent over time as we've enhanced some of our.
<unk> around pipeline, but keeping the guidance to really a run rate number at one point in time.
Okay.
And then I think probably also for you Brian can you talk about how you see the funding for the year playing out.
And where would you peg the cost of that incremental cost of debt as we sit here today.
Yes.
Good question.
Similar to some of our peers I guess I'll hit the last question first and it does depend on the day, but our debt and equity costs are relatively on top of each other again, it depends where the stocks trading.
Rates are but somewhere in that mid 6% area plus or minus.
Again, depending on the day.
So when you look at that I think again not dissimilar to some of our peers.
We're really thinking about how we utilize different funding sources when it makes sense to take on and lock in additional permanent debt. We do have capacity from a leverage perspective, but I think as we sit here point in time today, we have the forward equity agreement, we have some of the other capital sources I mentioned, we have significant capacity.
City under under the line and leverage that low so I would really look to those.
Source of capital to fund the activity that we have visibility into and of course, we'll look elsewhere as the investment pipeline evolves, but that's what we're looking at today Brad.
Okay. Thank you.
Thank you we'll take our next question from the line of Josh <unk> with Bank of America. Please go ahead.
Hi, This is Josh.
Josh Your line.
Quickly just want to point on.
The share that Stan can you just provide some color on the timing.
Funding of that and give us $110 million.
Acquisitions under contract.
Yes, I'll give you two perspectives on it I'll make sure I understand the question.
Go hand in hand that $110 million.
<unk> is predominantly development funding today that does vary by quarter again, depending on what we have under contract.
We expect that as we stated to be deployed over roughly the next 12 months I would think of that as a little bit more back ended just from what we've seen the nature of the products the cadence.
The development, so I would lean towards a backend weighting, but we will be funding throughout that next year.
And we will utilize our revolver and settling the forward equity as we manage our balance sheet sources of capital leverage utilization under revolver et cetera et cetera.
Over that year to fund those investments.
Great. Thank you.
Thank you we'll take next question from the line of Mitch Germain with JMP Securities. Please go ahead.
Okay.
Yes. Good morning, So Brian just to that point on guidance is it the goal to just updated per quarter as the year materializes.
Yes, that's what we've been doing for.
As far back as I know a couple of years and I think before then.
We're always open to conversations with with analysts such as yourself investors. If we can improve the disclosure to ensure that we're articulating our activity and our plans appropriately but.
But thats worked well for us I think in the past and it certainly in the environment. We're in even though we do have some visibility.
We continue to think that makes sense, so yes that should be the expectation.
Great and then.
I know you bought that it was only <unk>, but.
As you know kind of how is that strategy materializing.
With you guys or are you putting any.
Investment behind trying to grow that part.
Part of your portfolio.
Yes. This is mark.
Yes. The answer is yes, we thought dedicated some resources in that asset vertical to try and create some momentum as we've done if you think of years back when we entered the carwash space from kind of a.
<unk>.
Flatwoods start to a very healthy program, we hope to get that same momentum in all our assets that we are targeting.
So we've gotten some dedicated resources, we're attacking that as we do the other the other asset verticals with.
Business development Tradeshows business relationship management, and we hope that we hope to see some momentum in <unk>.
Balancing out the investments across all the asset classes.
Thank you so much maybe just missed.
Yes, just to add.
To add on.
One other thing that appeals to Australia, it's a natural extension of our underwriting real estate generally the same position on the street.
Same size.
Same sort of general investment per unit. So I think there's a lot of.
Logic, two extending to our broader what we call convenience and automotive industry asset classes.
Thank you.
Thank you.
<unk> wishes to ask a question at this time, our press star one on your thoughts John for now we're.
We're taking the next question from the line of Alec Fagan with Baird. Please go ahead.
Hi.
Quick question for me does your 2023 guidance assume any G&A or bad debt.
And if so can you go on.
Alcohol is the second part of your question G&A and what.
And bad debt.
So no bad debt in the G&A number.
But there.
There is a small amount of excuse me of a bad debt.
The guidance overall, but I would say it's de Minimis. If you look at our collections over time, including during the pandemic and general health of tenants cover great coverage ratios et cetera, I would call that de Minimis in terms of G&A, absolutely. We do have G&A running through there we are seeing some increases in <unk>.
Both what I'll call it the <unk> level, which is G&A that excludes stock based compensation.
That is primarily labor.
Labor inflation, whether it's our personnel.
Compensation and benefits as we look to retain and reward and invest in our team, but also the flow through.
<unk>.
Professional services that employ people of audit tax and legal so we are bearing the burden of some of that.
In addition at the P&L level.
We'll see a material increase as a result of stock based compensation.
Is simply because the stock has performed very well over the last 12 months and I think from wind.
We would have priced last years.
The stock awards versus when we do this year now the stock is up 20, 25% and that's.
That's really a direct flow through to the G&A line item as you look at the P&L again, we back that out for AFL I can see that in the in the headline number.
Okay. Thank you for that and if I can ask one more what do you think the cash G&A part.
Guidance would be.
At this time.
Yes, we're looking at probably just under $17 million, which is up just about $1 million or 7% from.
From what that was in 2022.
Okay. Thank you.
Yes.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd now like to turn the floor back over to Christopher constant for closing comments over to you Sir.
Thank you operator, and thanks, everyone for joining us for our fourth quarter call. We appreciate your interest in Getty and look forward to coming.
Let me back on with everybody when we report our first quarter of 2023 in late April .
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Yes.
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Okay.
Okay.
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Yeah.