Q2 2023 Getty Realty Corp Earnings Call
And welcome to getting you'd Vlt's earnings conference call for the second quarter 2023.
This call is being recorded after the presentation that will be an opportunity to ask questions applied to starting to cause Joshua tickell execute the vice President General Counsel and Secretary of the company. Please read a safe harbour statement I provide information about non-GAAP financial measures. Please go ahead mystical.
Thank you operator, I would like to thank you all for joining us for getting released second quarter earnings Conference call.
Yesterday afternoon, the company released its financial and operating results for the quarter ended June 32023, the form 8-K and earnings release are available in the Investor Relations section of our web site is getting real T dot.
Certain statements made in the course of this call are not based on historical information that may constitute forward looking statements.
Mr based on management current expectations and beliefs.
Subject to trends and uncertainties that could cause actual results to differ.
From those described in the forward looking statements. Examples of forward looking statements include our 2023 guidance.
Also include statements regarding the company's future future operations.
Financial performance or investment plans.
We caution you that such statements reflect our best judgment based on factors currently known to US and then actual events results could differ materially.
The company's address.
Form 10-K for the year ended December 31 2022.
When five is made with the F. C C 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 oil.
Statements reflect our view only yesterday.
No duty to update any forward looking statements that may be made in the course of this call also.
So please refer to our earnings release through a discussion of our youth non financial measures.
Our definition of adjusted funds from operations or a F F L and our reconciliation those measures to net earnings.
That.
Christopher since our Chief Executive Officer.
Thank you Josh good morning, everyone and welcome to our earnings call for the second quarter of 2023.
Joining us on our call today are Marco Lira, our Chief operating officer, Brian Dickman are cheaper natural officer.
I will lead off today's call by providing commentary on our future results investment activity and provide perspective on the company here to date accomplishments.
Usual Mark will then take you to our portfolio Bryan further discuss financial results.
And the second quarter, we produce healthy F. S O per share growth of 5.7%, which combined with our first half court first quarter performance results in first half 2023 earnings growth strong 6.7% over the first half of 2022.
This growth was driven by our robust investment activity and thoughtful capital markets execution over the past year, which we are particularly pleased with given the uncertain economic environment in which they've been awkward.
Year to date, we have invested more than $163 million, including $50 million in the second quarter and 52.5 million, thus far to the third quarter.
We were also able to increase our committee investment pipelines net of our aforementioned your date activity to more than $140 million under contract for the development and or acquisition of speeding stores Auto service centers Express total car washes Usr's all of which we expect to fund over the next nine to 12 months.
In addition to driving her earnings growth. These investments reflect our continued emphasis on scaling and diversifying our portfolio.
Particularly proud of our investments this year, given the choppy transaction Margaret.
<unk> continues to identify high quality opportunities to acquire or target acid types top msas around the country.
Discipline and true to our rigorous underwriting standards.
With respect to diversification, we've increased the percentage of our AVR from our newer asset classes. Thus far 2023, I was more than 85 per cent of our investments.
Directed.
Stores.
We've also added eight new tenants to the portfolio. This year all of which are strong operators plans to grow their businesses.
Precincts success by any new investment opportunities are established relationships. We will also seek the source additional transactions with.
2023 and beyond.
When we look at our pipeline.
A strong alignment of interest with our tenants.
He liked the incremental diversity that they bring to our portfolio.
On the capital side or urinate capital markets activity has provide us with attractively priced permit capital that continues to support creative investments.
We ended the quarter with approximately 120 million of unsettled forward equity and Undrawn revolver and a conservative Lebron to profile the provides additional flexibility and access to capital.
With regard to the health of the convenience store industry. The National Association of convenience stores recently published their state of these report for 2020.
Based on the next annual survey.
The source of cross every region of United States last year was another record year for each side.
Store sale.
Industrywide sales growing more than 9% popping 300 billion.
The next survey highlights increases in transaction accounts for both gasoline sales.
Transactions as well.
Gross profits fuel merchandise service.
Foodservice in particular continues to be a key driver.
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On the expense side to Mr operatives were not immune to significant increases in drugstore operating costs.
While you're related expenses and credit card. Please both Verizon substantial it.
Despite these headwinds that you take away from the report is the resilience of operators Embassy first sector, who have invested branding technology in store operations.
Overcome these challenges.
Continue to drive in Currie sales and profits.
As we move through the balance of 2023, our team remains focused on growing earnings while scaling of diversifying our portfolio.
We believe that in this market environment, we benefit from the targeted nature of our investment strategy and it's competitive advantages resulted from our sector expertise and the direct relationships we have with operators.
Operators in our space.
Are disciplined approach, which emphasizes owning high quality real estate major metro areas and partnering with growing regional and national operators continues to yield attractive acquisition and development funding opportunities.
We will continue to carefully underwrite each opportunities real estate characteristics certain level operations at 10 a credit.
Importantly, Arkansas leveraged balance sheet.
Mystery to access the capital should continue to support this investment activity.
For your additional value for our shareholders.
With that I'll turn the call over to Mark to discuss our portfolio investment activities.
Thank you Chris.
S at the end of the quarter or at least or.
Polio included 1045 net lease properties at four active redevelopment sites X.
Excluding the active redevelopment occupancy was 99.6% and are weighted average lease term was 8.7 years.
Our portfolio spans 39 states push Washington D C with 64% of our annualized base Red coming from the top 50, Msas and 82% coming from the top 100 Msas.
Or will cover with a trailing 12 month tenancy rent coverage ratio of 2.7 times.
Turning to our investment activities, we had another strong quarter, which still getting desk 50 million across the number of different property types.
Msas highly.
Hi, Lisa this quarter's investment activities include the acquisition of three Carwash properties located in diverse markets across the U S for 15.1 million.
One drive through quick service restaurant, Louisiana for $2.7 million.
Three under construction Carwash properties in southern California for $6.4 million.
This acquisition, we will provide additional funding during the construction period to complete these projects.
We also advanced development funding the amount of 25.7 million, including accrued interest for the construction industry car washes Gimme just or stores in auto service centers as part of these funding transactions, we will accrue interest or investments during the construction phase of the project and acquire these properties B a C.
El leaseback upon completion final funding.
Second quarter at the aggregate initial cash yield on our investment activity is approximately 7.2% Wade.
Wade average lease term required properties with 17.2 years.
Subsets subsequent to the corner and we invested an additional $52.5 million for the acquisition for development 12 convinced the worst carwash properties various markets across the U S.
The cumulative result of our investment activity year to date is gross investments 63.2 million at an initial cash yields is 7.2% spread across four or are targeted industries.
Looking ahead regarding the $140 million, a commitment fun acquisitions and development that Chris reference.
We expect to fund these transactions in the next nine to 12 months.
Average initially yells consistent with our year to date activity.
Valuating underwrite a variety of potential investment opportunities cross our target asset classes.
Cap rates of expand approximately 70 575 basis points, an average over the last 18 months with variability turning on asset class and tenant profile.
The market continues to adjust the changed economic landscape tighter access to credit.
<unk> that we are sourcing the vast majority of opportunities.
Network, which includes repeat business several high quality tennis.
Leveraging our reputation and proven ability to perform create new relationships.
We believe we are well positioned to invest accretive Lee as we knew screen remainder of 2023.
Moving to a redevelopment platform during the quarter reinvested approximately $1 billion in projects, which are in various stages of our pipeline.
Completed one day, one redevelopment project, where rent convinced any new convenience store in the Austin MSA, which is at least a quick trip.
A total of $1.2 million to the project, which include the acquisition to the Jason plan generated return on invested capital of 10.5%.
We ended the quarter with four properties under active redevelopment and other at various stages visa bill be planning for potential recapture rhonette least portfolio and expect to continuously computer complete projects over to you.
Next few years.
Into our asset management activities for the second quarter, we exited one lease property and there were no property dispositions without.
But now they will turn.
Turn the call over to Brian discuss our financial results.
Thanks, Mark morning, everyone.
Last night, we reported <unk> per share 56 cents for Q2, 2023, representing a 5.7% increase over the 53 cents per share we recorded in Q2 2022.
F F net income for the quarter 52 cents at 26 cents per share respectively.
Our total revenues were $44.7 million for the second quarter, representing an eight and a half per cent increase over the prior year.
Base rental income, which excludes tenant reimbursements in gap revenue adjustments or seven 6% to $39.6 million.
<unk> continues to be driven by our acquisition activity and recurring rent escalators and our leases with additional contribution Recommencement Ah completed redevelopment projects.
On the expense side G&A cost for $5.9 million in the second quarter as compared to $5.3 million in the second quarter of 2022.
<unk> was primarily due to increased personnel costs, including non-cash stock based compensation.
Total property costs were $4.8 million for the quarter as compared to $5.3 million for the second quarter of 2022.
Pretty operating expenses declined by $400000 due to reductions in rent expense and reimburse real estate taxes.
Leasing and redevelopment expenses also declined slightly due to reductions in demolition costs for redevelopment projects.
Environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments to $300000 in the quarter as compared to a credit of $15 $9 million for the second quarter of 2022.
As a reminder of the credit in 2022 was due to the removal of previously accrued reserves for unknown environmental liabilities at certain properties.
Turning the balance sheet in our capital markets activities, we ended the quarter with $675 million total debt outstanding consisting entirely of senior unsecured notes with a weighted average interest rate of 3.9% and weighted average maturity of seven years.
As of June 30th net debt to EBITDA was four nine times in total debt to total capitalization was 28% while total indebtedness to total asset value is calculated pursuant to our credit agreement was 35%.
Taking into account unsettled forward equity of $120 million, that's EBITDA would be approximately four times.
Our 300 million dollar revolving credit facility was completely on drawing a quarter N at our nearest that maturity as in 2025.
Moving to the a T M program during the quarter, we settled approximately 1 million shares of common stock subject to forward sale agreements for net proceeds of $31.2 million. We also entered into new forward Sal agreements for approximately 218000 shares of common stock, which will generate anticipated gross proceeds seven $6 million.
We currently have a total of 3.7 million shares subject to foresail agreements, which upon settlement are anticipated to raise gross proceeds of approximately $120 million.
Returning to the $140 million committed investment pipeline as Chris mentioned, we anticipate funding. These transactions proceeds from our out standard forward equity agreements as well as our Undrawn revolver.
Pro forma for these investments are capital activity, we expect our balance sheet to remain well positioned to support continued growth.
Leverage is expected to remain in line with our target range of four and a half the five and a half times net debt to EBITDA and we expect to maintain the ample capacity under our revolving credit facility.
Our investment pipelines evolves, we will continue to evaluate all capital sources to ensure that we're funding transactions in a creative manner, while maintaining our investment grade profile.
With respect to our environmental liability, we ended the quarter of $22.9 million reduction of $238000 since the end of 2022.
Environmental remediation spending in the second quarter was approximately $1.2 million.
Lastly, we are narrowing or 2023 per share guidance to arrange a $2.23 to $2.24 from our previous range of $2.22 to $2.24.
As a reminder outlook includes transaction capital markets activities to date, which is not otherwise assume any potential acquisitions dispositions or capital markets activities for the remainder of the year.
Specific factors, which continued to impact our guidance include variability with respect to certain operating expenses and deal pursue cost.
And approximately $300000 I anticipate it demolition cost redevelopment projects, which run through property cause.
I will ask the operator to open the call for questions.
Thank you.
Now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Information to authenticate your line isn't a question Q.
<unk>, if you would like to move your questions from the queue.
<unk> equipment.
Sweet.
Before pressing the stocky.
One moment, please be pulling for questions.
The first question comes from the line off.
Joshua.
Please go ahead.
Hi, This is Pat.
Gosh.
My question is.
Specifically.
Considering what you've already.
For clothing for Q3.
Make a comment about maybe.
A year.
Apparently there's a little bit hard to hear you I think you're you're asking about the pipeline, but we expect to deploy the balance of the year.
Yes, especially considering piece that has already been announced Q3.
So.
We stayed in the pipeline in the Gulf Ford basis, we expect those those transactions to close over next you know nine to 12 months some of that pacing is dependent upon and the development funding program the timing of construction completion permits in an.
Actual clothes out of those those particularly transactions, but that's a forward look over the next two to three three or four colors I would say.
Yes, Sir we typically guide when we put out that pipeline and the timing for deployment. The best estimate is usually going to be some kind of you know straight line deployment. Those that are acquisitions will will come out a little bit sooner and then tomorrow marks points, that's with that which is development funding will be a little bit later, but I think.
The modeling perspective, we generally assume that it'll happen you know relatively evenly throughout that time period.
Great. Thank you so much.
Thank you next question comes from the line off toward Thomas Funky Bank capital markets. Please go ahead.
Hi, Thanks. Good morning first question you commented that the investment yield on on acquisitions was 7.2% in the corner. It sounds like that's what's anticipated you know on the on the committed pipeline moving forward or or what's locked in there do you see any additional upside in investment yields moving forward as you want.
[noise] right new deals or do you expect pricing to remain stable at these levels and then you know at those price levels. You know I guess, that's it appears investment activity is picking up a little bit can you just talk about you know the pipeline and volume of deals that that you're saying.
Yeah, I would say with respect to yield there might be a modest expansion over it over the balance of the year I think the the moment, we reference that we've seen over the last 12 to 18 months is moderated slightly that said within different asset classes will continue to push pricing. So.
Different assets are.
Stickier than others, but I think specific to your question you know the email said that seven two ish percent are are probably you know.
A good way to think about the forward pipeline.
Okay. So so sad and 0.2 is is is the right yield to think about for the committed pipeline, but new deals that you might put under contract there could be a little bit additional cap right expansion, yeah that can be so modest expansion, there, but I wouldn't I wouldn't put it in the same.
<unk> paces as we we have the 18 months look back in at 75 points, there's it's going to be much more modest and I think I think in many of our asset classes those those categories. So much stabilised.
Okay, and then can you remind us or talk about how the yield that you achieve on developments development funding and and you know.
You know properties that you'll acquire at completion, how how those yields compare to the pricing on on stabilized acquisitions, you know what the spread looks like and and and you know is there is there a preference in terms of how you allocate capital between those those two buckets.
Yeah, just a couple of questions Yeah, I guess, so the blended the blended retard out we reference includes obviously the traditional sale leaseback deals and developments finding deals specific to the the range within those two type of deal structures, we'll see anywhere from you know roughly a quarter point premium twenty-five basis.
<unk> premium on developed funny because of the the value we offer to the forward commitment and some of the timing the deployment of those funds.
There are some colors for deals that go out further than that.
Protect against market fluctuations.
With regard to.
Our preference, they're both good products for us and for our our our partners are 10, a partners that are developing is a great source of capital on a forward committed basis for their new to industry construction and.
Over a year look I would say, it's it's roughly balance between both products.
Pretty pretty close to easily across.
Across all investments.
Okay, and then I I know, it's you know a small take down and and occupancy but occupancy across the portfolio decreased you know another 10 basis points. It was the second straight corner and I was just wondering if you could talk about that and.
You have very limited role in the next two or three years, it's it's less than 2% of a P. R through through 24, but just curious you know what you're seeing and whether you expect you know any additional occupancy loss or any move out or anything of that nature.
Todd This is Chris I wouldn't read too much into that we're talking I think literally about one property or.
<unk> portfolio was lost at least very little roll over the next 12 to 24 months. So.
Expect that number to movements early.
In the near term.
Okay, Alright, great. Thank you.
Thank you next question comes from the line of Mitch jump on the G. N P. <unk>. Please go ahead.
Hi, good morning.
Is I think you mentioned 85 per cent of investments you know kind of others assets.
And then C stores is the lack of deal activity and the sea storefront is that a function of pricing or competition or inventory's rising to read there.
I again, I wouldn't read too much into that it's it's been our focus over the last couple of years has to be underwriting in acquiring a cross all the various asset classes that were.
Focused on here.
You know certainly value size and diversity. So we're pleased to that we're able to bring in must be said eight new tenants in and diversify our ABR cross and that's N and asset classes.
You mentioned with one of our assistant partners or a new partner and she stores wants to.
<unk> and are able to make that work, we would certainly increase the percentage of artsy store investments for the balance of the year.
Got you and then to that point, Chris is there like a targeted mix when you look at the different asset classes that you want.
Yeah, I I think we're still in the scale I'd say, the scaling up phase for especially the drive through sector or even the auto service sector. So I think it.
If you look out we'd certainly like to be more balanced I'd say the majority of our underwriting has been in some stores and car washes your date, but as we ramp up those other two verticals for us.
I get our our plans internally here are to be much more balance has been worked out over the next several years.
Great last one for me.
It seems like you're getting a little bit of a longer lease term on some of the more recent investments. Obviously development is the least structure similar in terms of the kind of escalators are getting.
Yes, Yeah, it's really we've got some some basic terms average you to 15 or 20 years. So you really.
Neil specific and it just depends on what the close quarter to quarter.
Great Court R. Thank you.
Thank you next question comes from the line of accident <unk> with J P. Morgan. Please go ahead.
Hi, good morning.
I'm, calling from J P. Morgan My first question can you elaborate on the overall current credit and anything on the watch list at this time.
Yeah, we've talked about this in the past for us given the the the level of sight level reporting we get we really tend to look at <unk>.
Property specific sites.
Watch list, so big picture as we do not have any tenants on a watch list at this point, but inside the portfolio of there's always several properties that we're talking to our tenants about.
Whether or not it's a candidate for redevelopment or for releasing or potentially disposition, but the the number of properties that we're looking at really hasn't move substantially quarter to quarter.
Yeah.
<unk> the next state of the industry data.
Continue to do very well in this current environment Carwash tenants are continuing to perform well.
So we're fortunate that we.
Own properties in these sectors and with that said, we're always looking at a handful of properties of Oxford tenants.
Best outcome for those sites.
Got it. Thank you and one last question with the number of the deals in the pipeline being new stores for these talent how long does it take for the assets to stabilize and visa targeted ran coverage.
Yeah. So we typically in our underwriting model, we assume anywhere from two to three years, depending on the asset class and we track those from Grand opening on a quarterly basis. We've had some recent successes where they've stabilized earlier than two years, but for.
For initial underwriting on a pro forma basis will will look at it anywhere from two to three year initial ramp up to stabilize the sales the top line sales and then typical industry growth following that.
Alright.
Have you on.
Yeah.
Thank you next question comes from the line of Alex <unk>.
Please go ahead.
Hi, guys. Thank you for taking my question. The first is on the investment pipeline out of the 44 properties you have in there what kind of the next between acquisitions and development.
It's roughly half have each again as I said earlier.
The pipeline is a snapshot time different.
<unk> transactions cut it up and flow in and out of the clothes acquisition down the pipeline, but you know as of today the program.
It would probably look at it as bad equally blended between traditional sale leaseback had developed funding.
Okay. Thank you for that.
Go back to the Watchlist question I know you guys don't track tenants you have a site.
Slight level of reporting.
Out of the 8% that don't report how do you track those properties.
Properties and.
What kind of properties are there.
Yeah. This is Brian and just to.
Clarify, it's not that we don't track or tennis, we just don't have any tennis on a watch list. So just make sure that that that points coming across we obviously do monitor it.
We do we do the best we can what times, where we have less visibility can between the site level between the public reporting your capturing.
Over 90 per cent of Red probably the most important thing those other 8% are paying rent timely right. So so that's obviously an indicator of how they're managing their business and then just in general as part of our everyday asset management activities right with guys that are reaching out to tenants periodically to check in on on <unk>.
[noise] businesses.
Okay.
Thank you for that that's all my questions.
Thank you next question comes from the line of batteries, but Johnny on comedy Scott Bitcoin.
Good morning, Thanks for the opportunity to ask a question.
In the Wall Street Journal today, there's a a lead story about how the <unk>.
Automotive companies.
Or.
Forming a joint venture to invest a billion dollars.
To build out charging stations and.
And I'm curious, what's your view on the impact on the service station component of our portfolio may or may not be with respect to that.
Investment by the carmakers.
I think.
It seems that we talked about in the in the spirit of industry report or are still what's really driving the industry for at this point. They are our tenants are focused on.
Whether folks need gas or whether they need to charge their vehicle and they're seeing expanded profits from those categories.
Certainly.
We follow the industry or tennis ball the industry aware of all the trends as as it relates to.
Growing sure babies in the market, but thus far our tenants have been very successful at driving additional business and drive it additional profits from the store.
What are the folks are stop it for I feel like this or not I think that it was.
Trying to continue as we look out for the next several years.
Alright, thank you.
Thank you there are no further questions at this time I would like to turn the floor back or to Christopher constant closing comments.
Great. Thank you operator, and thank you everyone for listening in on our call. This morning.
Look forward to getting back on in October or report, a third quarter updating everybody on our activity at that point.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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Mmm.
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