Q3 2023 Getty Realty Corp Earnings Call
Good morning, and welcome to Getty Realty's earnings Conference call for the third quarter 2023. 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 tanker.
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 and operating results for the quarter ended September 32023 form 8-K earnings release are available.
Form 8-K and earnings release are available in the Investor Relations section of our website at Getty Realty Dot com 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.
Subject to trends events and uncertainties that could cause actual results to differ materially from those described in the forward looking statements examples.
Statements include our 2023 guidance and May also include statements made by management, including those regarding the company's future operations future financial performance or investment plans and the opportunities. We caution you that such statements reflect our best judgment based on factors currently known to US and then.
Actual events or results could differ materially I refer you to the Companys annual report on Form 10-K for the year ended December 31 2022.
Subsequent filings made with the SEC for more detailed discussions 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 us.
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 <unk> and our reconciliation of those measures to net earnings with that let me turn the call over to Christopher.
<unk>, our Chief Executive Officer.
Thank you Josh good morning, everyone and welcome to our earnings call for the third quarter of 2023.
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, along with some perspective on our outlook in light of the ongoing economic uncertainty.
As usual Mark will then take you through our portfolio.
Ian will further discuss our financial results and guidance.
In the third quarter, we produced strong <unk> per share growth of five 6% and for the nine months ended September 30, yet our <unk> per share grew a healthy five 7%.
This growth continues to be driven by our robust investment activity and thoughtful capital markets execution.
Year to date, we have surpassed the companys previous record for annual investments by deploying $269 million, including 155 million in the third quarter.
We also continue to maintain an attractive investment pipeline with more than $95 million under contract for the acquisition and development funding of convenience stores Auto service centers and express powered car washes all of them.
Which we expect to fund over the next six to nine months.
When combined with our investments to date, our pipeline provides visibility into our earnings for the fourth quarter, Eric growth prospects for the next year.
The ongoing success of our investment platform and steady growth in our cash flow and earnings can be attributed in part to our successful capital markets activity.
Since January of 2022, we have raised more than $600 million of attractively priced capital much of it with a forward or delayed draw execution.
Including our recently announced $150 million unsecured term loan $225 million of long term unsecured notes and more than 230 million of common equity.
Our strategic approach to raising capital has enhanced our ability to lock in accretive investment spreads.
Supported command investment pipeline that is fully funded and maintain a balance sheet with moderate leverage and ample capacity for future transactions.
We believe that getty's business model of focusing on automotive.
Automotive retail assets provides us with a competitive advantage in the market given our sector expertise tenant relationships and track record of execution.
Many of our completed transactions this year have come from fitness, meaning we already have a lease in place with our counterparty and are capitalizing on our relationships and transaction experience to bring new properties into the company's portfolio with tenants that are well known to us.
Have a proven record of performance through economic cycles.
We have also successfully increased our initial yields with these tenants to reflect current market pricing, while not sacrificing our rigorous underwriting standards.
The net result is that we continue to buy the same quality properties in sectors, where we have significant knowledge of industry trends and with tenants, we know well, but at prices that reflect the rapid rise in financing costs.
As we look beyond our pipeline of deal activity the real estate market has changed significantly since the end of the second quarter.
Rapid changes in the availability and cost of capital have outpaced sellers' expectations for the value of their properties.
For Getty, specifically, we believe prospective tenants were often making long term financing decisions related to M&A or development or in the process of reevaluating their capital structures to reflects less access to capital and lower values attributable to real estate financings.
While we continue to identify opportunities to acquire assets that meet our rigorous underwriting standards, we expect to be disciplined in our capital deployment, while the market continues to fully digest, the reality of higher cap rates for the foreseeable future.
Given our performance year to date committed and funded investment pipeline and earnings growth expectations. Our board approved an increase of four 7% and our recurring quarterly dividend to <unk> 45 per share.
This represents the 10th straight year, we have grown the dividend alongside our earnings growth.
Our board believes this annual increase is appropriate as it maintains a stable payout ratio continues to increase Getty has retained cash flows to have more investable capital to meet our growth objectives.
Additionally, as a result of our year to date investment in capital activities. We are raising our 2023 <unk> guidance by a penny or $2 24 to $2 25 per share.
<unk> is well positioned for the current environment, given the essential nature of our assets the operating strength of our institutional tenant base and our well positioned balance sheet.
Low to moderate leverage and ample liquidity.
In a challenging market, we believe that we benefit from the targeted nature of our investment strategy due to our sector expertise and strong relationships with operators in our space.
Our disciplined approach, which emphasizes owning high quality real estate in major metro areas and partnering with growing regional and national operators will continue to afford us with attractive acquisition and development funding opportunities to underwrite.
As a result, we remain confident in our ability to create shareholder value through earnings growth and portfolio diversification.
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 quarter. Our lease portfolio included 1074 net lease properties and three active active redevelopment sites. Excluding the active redevelopments occupancy was 99, 7% and our weighted average lease term was nine years.
Our portfolio experienced 40 States, plus Washington, Washington, D C with 61% of our annualized base rents coming from top 50, Msas, 79% coming from top 100 Msas.
Our rents are well covered with trailing 12 month tenant rent coverage ratios of two seven times.
Turning to our investment activities, we had a record quarter. So getty invest $155 million net of amounts previously funded across 50 properties and a number of different property types and attractive msas.
Highlights of this quarter's investments include the acquisition of nine convenient stores located in Las Vegas in various markets across Texas, and the southeast for $55 1 million.
Nine car wash properties, which are located through the U S were $48 5 million.
Two drive through quick service restaurants, and Auto service Center REIT totaled $3 5 million and nine under construction car wash properties for $31 5 million.
As part of this acquisition will provide additional funding during the construction period to complete these projects.
We also advanced incremental development funding in the amount of $16 6 million, including accrued interest.
Construction of 'twenty due to industry car washes convenience stores auto service centers.
These assets are either already owned by the company and are under construction or will be acquired via sale leaseback transactions at the end of the project's expected construction periods.
For the third quarter, the third quarter the aggregate initial cash yield on our investment activity was approximately seven 2% and a weighted average lease term for acquired properties was $17 two years.
Subsequent to quarter end, we invested an additional $3 3 million towards the development.
Our car wash properties.
Cumulative result of our year to date investment activity is $269 million deployed at an initial cash yield of approximately 77, 2% across all of our targeted asset types.
Looking ahead regarding the $95 million of commitments to fund acquisitions and developments, we expect to fund these transactions through the next six to nine months at an average initial yield of approximately 20 basis points in excess of our <unk>.
From a market perspective in many cases, we are now submitting offers that are approaching 150 basis points more and where we transacted in 22021 and 2022.
Amount of cap rate expansion combined with the short duration, which these moves and asset pricing has occurred.
Cause many sellers to pause we believe the market will adjust to the changed economic landscape and will stabilize as sellers of wild and modify their expectations.
The direct nature of our investment strategy affords us the opportunity.
These changes directly with decision makers and we believe that we can continue to identify accretive investments as we move through the remainder of 2023 and into 2024.
Moving to our redevelopment platform during the quarter, we invested approximately 460000 projects, which are in various stages in our pipeline.
We completed one redevelopment project, where rent commenced on an automotive parts store in Pennsylvania, which leads to autozone.
We invested a total of approximately 200000, new project generated incremental return on invested capital of approximately 21%.
We also completed the renovation of a convenience store property in Connecticut, which was already subject to a long term triple net lease.
In this project, we invested 450000 and our incremental return on the invested capital was seven 5%.
We ended the quarter with three properties under active redevelopment either in various stages of feasibility planning for potential recapture from our net lease portfolio.
We expect to continue as you complete projects over the next few years.
Turning to our asset management activities for the third quarter, we exited one of these properties and sold two properties for aggregate gross proceeds of $1 9 million.
With that I'll turn the call over to Brian for our financial results.
Thanks, Mark good morning, everyone.
Last night, we reported 8% <unk> per share of <unk> 57 for Q3 2023, representing a five 6% increase over the 54 per share reported in the prior year.
<unk> net income for the third quarter of <unk> 50, <unk> 31 per share respectively.
Total revenues were $50 5 million for the third quarter, representing a 23% increase over the prior year.
Base rental income, which excludes tenant reimbursements and GAAP revenue adjustments grew 10, 5% to $40 9 million.
This growth continues to be driven by our acquisition activity and recurring rent escalators leases additional contribution from rent commencements at completed redevelopment process.
On the expense side G&A costs were $5 $7 million in the quarter as compared to 5 million third quarter of 2022.
Change in G&A was primarily due to increased personnel costs, including noncash stock based compensation.
Total property costs were $8 $7 million for the quarter as compared to $5 7 million.
Third quarter of 2012.
This quarter included the increase in property operating expenses.
Timing of reimbursed for real estate tax payments, partially offset by lower rent expense and also included increase in <unk> expenses due to additional professional fees and demolition costs.
Yes.
Environmental expenses, which are highly variable due to a number of estimates and noncash adjustments were $313000 in the quarter as compared to $632000 for the third quarter of 2012.
Turning to the balance sheet and our capital markets activities. We ended the quarter with $750 million of total debt outstanding is consisted of $675 million of senior unsecured notes with a weighted average interest rate of three 9% and a weighted average maturity of six seven years as well as $75 million drawn on our 300.
Revolving credit facility.
As of September 30th net debt to EBITDA was five times total debt to total capitalization was 35% while total indebtedness to total asset value as calculated pursuant to our credit agreement was 37%.
Taking into account unsettled forward equity of $48 4 million.
Net debt to EBITDA will be approximately four seven times.
Subsequent to quarter end as Chris mentioned, we closed on a new $150 million senior unsecured term loan.
Matures in October 2025, with 112 month extension options.
The term loan includes an initial draw of $75 million that was funded at close and used to repay amounts outstanding under our revolving credit facility.
The additional $75 million that can be funded at our option anytime over the next six months.
In connection with the closing of the term loan we entered into interest rate swaps to fix so for for the full principal amount.
Putting the impact of the swaps the effective interest rate on the term loan a six 3% based on our leverage ratio as of September 30th.
So a little bit more color on the term loan we were obviously pleased to secure this financing in the current environment.
It demonstrates continued access to capital and the support of our banking relationships, while providing us with a flexible loan that we can refinance in two to three years as the capital markets stabilize and importantly, as we continue to scale, our platform and position our balance sheet for additional credit ratings and a possible public bond issuance.
While the shorter term prevented us from taking greater advantage of the inverted yield curve. Upon fixing the rate we are still able to lock in material accretion relative to the returns on our invested capital while keeping our investment pipeline funded and retaining the flexibility I mentioned.
Moving to our equity capital markets activities during the quarter. We settled two 2 million shares of common stock are subject to outstanding forward sale agreements.
Right at $71 6 million in net proceeds.
We currently have approximately $1 5 million shares of common stock still subject to outstanding outstanding forward equity agreements, which upon settlement are anticipated to raise gross proceeds of approximately $48 4 million.
Returning to the $95 million committed investment pipeline as Chris mentioned these transactions are fully funded through a combination of proceeds from outstanding forward equity agreements and the future.
Pro forma for these investments and capital activity, we expect our balance sheet to remain well positioned to support the company's growth.
Leverage is expected to remain in line with our target range of four five times to five five times net debt to EBITDA and we expect to maintain ample capacity under our revolving credit facility.
Our investment pipeline evolves continue to evaluate all capital sources to ensure that we're funding transactions in an accretive manner, while also maintaining our investment grade credit profile.
With respect to our environmental liability, we ended the quarter at $22 $7 million, which was a reduction of $438000. Since the end of 2022, our net environmental remediation spending in the third quarter was approximately $1 6 million.
Finally, with respect to our 2023 earnings outlook as a result of our year to date investment activity and capital markets transactions. We are raising our 2023 <unk> per share guidance to a range of $2 24 to 2025.
From a previous range of $2 23 to $2.
As a reminder, our outlook includes transaction and capital markets activities to date, but does not otherwise assume any potential acquisitions dispositions or capital markets activities for the remainder of the year.
Specific factors, which continue to impact our guidance include variability with respect to certain operating expenses to deal pursuit cost as well as $300000 of anticipated demolition costs for redevelopment projects that run through property cost on our P&L.
With that I'll ask the operator to open the call for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
<unk> tone will indicate your line is in the question queue.
You May press star two if he 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 while we poll for questions.
Okay.
Our first question comes from Todd Thomas from Keybanc Todd. Please proceed.
Hi, Good morning. This is <unk> on for Todd Thomas I was just wondering if you could disclose what the blended cash investment yield was on the <unk> investments and could you break out the yield on the acquisitions versus the development funding. Thank you.
Yes.
In our remarks size seven 2% was the initial cash yield in the third quarter.
And then roughly.
The same return between acquisitions development part of it.
Okay, and do you see yields trending higher given the rise and borrowing costs, how should we think about the yield just given that you already have a committed pipeline in place.
Yeah.
Again with the $95 million that is committed.
As we mentioned, we think that that's going to be about 20 basis points over where we invested in the third quarter.
And then as Mark mentioned in his remarks.
We are putting out new.
Letters of intent.
Rates are significantly.
Higher than those levels.
And the one nuance I would just add this is Brian to Chris's comments is development funding transactions by design are.
15 month type transactions that some of the dollars that are going out and development funding are still add yields from transactions that were cut 12, 18 months ago versus the sale leasebacks or the more traditional acquisition activity, obviously shorter timeframe.
Reflective of current environment. So.
I think it's consistent with what Chris said, we're seeing yields absolutely move up but some dollars going out are still based on transactions that would cut a while back versus others will reflect the current environment.
Okay.
Where are you still seeing the best opportunities and pricing high convenience store competition, alleviated or what about automotive and carwash.
Yes. This is mark so we're very active in all of our asset classes, we are getting a lot of momentum.
Certainly some of the asset classes tend to be.
A little sticky around pricing as as market cycle through but we remain competitive and a tremendous amount of opportunity certainly.
These store Carwash automotive parts.
Say that the most competitive probably now is the quick service restaurant category as far as.
Pressure on pricing.
Great. Thank you.
Okay.
Thank you. Our next question comes from Wes Golladay from Baird.
Please proceed.
Hey, good morning, everyone, just a follow up on.
The question about the cap rates moving higher I guess, how do you balance that versus having a rent coverage maybe come under a little bit of pressure or are you seeing the operations of the tenants kind of grow in line with this more inflationary environment.
Yes.
Excuse me, it's Marc So we certainly haven't deviated from our underwriting model and our and our total valuation.
Look at each each deal and each portfolio, yes. So we haven't seen much of a deterioration in tenant rent coverage on the underwriting of new opportunities.
So.
I think the answer is yes.
Move in the market.
Generally.
The other factor Wes.
On proceeds that tenants received right. So if you think of a typical sale leaseback transaction right, where we're going to set rents at a rent coverage ratio and then apply some cap rate to that to determined proceeds to the tenant right. The math would lead to either higher risk, which is what you're alluding to but given our underwriting and consists.
See there as Mark mentioned, the net result would be less proceeds to the tenant which is reflective of Christmas.
Opening comments about folks in the space, just having to come to the realization that the real estate isn't as worth worth as much today as it may have been <unk> 30 months ago.
Okay, Yeah, thanks for clarifying that I appreciate that Brian.
I guess, then with capital become a little bit more scarce and maybe looking at alternative forms of equity for you you do have a part of the portfolio, that's probably not appreciated by the market, where you could probably still get relatively low cap rates do you have any increased appetite to start monetizing some of these lower cap rate assets.
Yes, we certainly will look at the portfolio and are aware of where we think there is maybe outsized value.
It was do dispose of properties disposal wells.
Paul portfolios over the past couple of years.
Certainly something we're aware of.
We'll look to look around but right now I think the balance sheet is in great shape. The term loan certainly helps with but that we still have roughly $50 million plus sell forward equity.
Transact, where it makes sense.
Great. Thanks for the time everyone.
Yes.
Our next question comes from Mitch Germain from JMP Securities Mitch. Please proceed.
Hi, This is acuity format and the first question I had is just understanding the composition of the pipeline.
This asset class and also if you're seeing any changes in the lease structure maybe Tom.
Tom or escalators.
Yeah.
So we continue to balance out the pipeline across again across all our asset classes. During the course of the year is always ebbs and flows as you know the deal cycle through.
Our goal is to be fairly well distributed across all asset classes geography had a mix be mindful of the tenant concentration.
And geographic concentrations.
With regard to <unk>.
<unk>, yes, we've been able to not only.
Pushed pricing in return.
But also.
In shop or put some pressure on our annual escalators.
Where appropriate.
The term the actual lease terms are still roughly.
15 to 20 year base term on initial an initial commitment.
The market certainly is.
<unk>.
Conversations certainly had yielded all.
All deal points to create overall value for us.
Oh, yes, so I mean, those have been declining composition overdraw, but on terms of asset pricing.
Are you seeing similar price declines with dose as compared to other assets in our pipeline.
Yes, I think.
There are two thoughts on that question so first off.
Our portfolio one of our objectives is to diversify across convenience in automotive retail real estate, so with a background of our business Big primarily C store.
Natural at RIS fee.
The composition of our rent and become more balanced across all the categories that we're investing in.
We're still very comfortable with the C store sector.
Acquired nine great assets this quarter.
And expectation that has to be understood by sellers debt.
Pricing has changed finance it costs dictate dictated that.
In order to transact with sellers out there kind of expectation that rates are going to be higher for longer meaning that cap rates are coming are going up.
And therefore, the value of their real estate is going down.
And I'll, just add to that which I think is implicit in what Chris is saying, it's something we've talked about before but the nature of the sale leaseback business, which is our primary origination platform.
Versus just aggregating assets from from a variety of sellers El.
We're making real estate investments that they're making financing decisions.
And so theyre looking at their financing alternatives at sale leaseback financing is just one of those and we happen to be particularly competitive in that area. Today, so as long as our cost of capital or return their cost of capital allows them to meet their hurdle rates right. We can find opportunities to transact I think the main point you're here.
From all of US is that there is some transparency in our discussions and given our relationships our knowledge, where we're saying that these tenants like our costs are going up we're open for business. We can transact has to meet our real estate underwriting expectations and it has to meet our pricing expectations and we've had some success certainly hope.
In the last year and being able to drive those conversations to transact.
So just on that point.
All the different asset classes, and our pipelines seeing similar kind of price pressure or is it different for different.
Got it.
This is Bryan I think it's really driven by where we are in our lifecycle with the different asset classes, and certainly carwash and CMG, but we are going direct to those tenants frequently and primarily you.
You can see that the most.
Our relationships as we just entered that sector say within the last 18 to 24 months.
And <unk>, we've really just started dedicating efforts to within the last 12 months. So we're still working to build up those relationships. So that we can have those conversations so it's a long way of saying probably see it more in car washes P&G and we're getting there at auto service.
And in <unk>, we're still sort of making our way through ramping up in that in that sector. So that we can again drive drive that type of activity.
Okay. Thank you and just the last one from me you mentioned that the pipeline is fully funded and part of that was it turned out to do we have any expected timeline for the second tranche of data on that.
Sure.
Yes, it'll be within the next six months right because that's the term of that and as always we're looking to balance funding the transaction, maintaining our leverage profile maintaining liquidity. So.
Between that and the equity, we'll we'll draw on each of those pools as it makes sense to maintain the balance sheet and that will occur over the next six months.
Okay. Thank you for the question if that's all from me.
Operator are there any more questions on life.
Okay.
Okay. It does look like we have one more aki.
<unk> from Jpmorgan.
Please proceed.
Hi, good morning.
JP Morgan first question is on how does the cost of the sale leaseback compared with one operator does auto financing does right now.
I think your question was how does the pricing of a sale leaseback.
Compare to the various other financing alternatives that our tenants have.
And what I'd say.
But what I'd say is that.
Most of our tenants being.
Brian.
Large regional or national operators.
Their access to capital is generally private equity.
Or the bank market or private lending market.
All of that has gotten more expensive tougher to transact quite frankly, so I think what we're seeing is a lot of lot more underwriting opportunities.
Were sale leaseback, probably looks a little more attractive to our tenants.
With all that said I think that we maintain a fairly rigorous underwriting process here and our focus on real estate.
Tenant.
Property up or down to the property level.
So I don't think it necessarily changes.
Our view of whats attractive or not but I would say that sale leasebacks are they it looks more appealing to the tenants today than it did probably six nine months ago.
Understood. Yeah. One last question how much opportunity do you think of that in the <unk> business and albeit does consolidate locations in that space.
Yes, I think I think carwash was a sector that had a lot of capital flowing into it over the last several years, obviously the view of the tenants in that space. If there is a lot of room for new store development is the express tunnel model takes share from traditional car washes.
Yes.
In our view in that space has been that we want to be with large established operators, who have a track record of operating as well as growing in this sector.
We've got a pretty good job with that in terms of picking our relationships there.
We're focused on not only providing capital to the sector, but really partnering with.
Great tenants long term.
Our space and I do think youre going to see some consolidation there in.
Again, our view is that our tenants are going to do well in this environment.
And the product continue to grow and invest in new store development are worth for M&A.
Thank you for taking the questions.
Okay.
This concludes our question and answer session I would like to turn the floor back over to Chris Carlson for closing comments.
Great. Thank you everyone for joining us for our third quarter earnings call. We look forward to getting back on with everybody. When we report our fourth quarter and full year results for 2023.
Okay.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Yeah.
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