Q4 2023 Getty Realty Corp Earnings Call
Good morning, and welcome to Getty Realty's earnings Conference call for the fourth quarter 2023. This call is being recorded after the presentation, there will be an opportunity to ask questions.
We're just starting to call Joshua Dicker Executive Vice President and 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. Decker.
Thank you 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 and operating results for the quarter and year ended December 31, 2023, the 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 and are subject to trends events and uncertainties that could cause actual results to differ materially from those described in the forward.
Looking statements.
Examples of forward looking statements include our 2020 for guidance and May also include statements made by management, including those regarding the company's future company operations future financial performance of our investment 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, 2022, and our subsequent filings made with the SEC for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
You should not place undue reliance on forward looking statements, which reflect our view only as of the date hereof 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 or use of non-GAAP financial measures, including our definition of adjusted funds from operations or <unk>.
And a reconciliation of those measures to net earnings with that let me turn the call over to Christopher constant our Chief Executive Officer.
Thank you Josh good morning, everyone and welcome to our earnings call for the fourth quarter and year end 2023.
Joining us on the call today are Mark Olear, our Chief operating officer, and Brian Dickman, Our Chief Financial Officer.
I believe off today's call by summarizing our financial results and investment activities and we will provide commentary on how we are effectively executing on our growth objectives in a thoughtful and disciplined manner.
As usual Mark will then take you through our portfolio and Brian will further discuss our financial results and guidance.
2023 proved to be another strong year for Getty and set us up for continued growth in 2024, we.
We invested a record $326 million.
Raised 295 billion of attractively priced capital and continued to advance our portfolio of diversification objectives.
We entered new markets and expanded our presence in top msas around the U S with.
We spread our investments across all of our target sectors and carefully structured transactions to provide certainty of funding for our growing tenants and to minimize our risk.
Our successful investment activities combined with our healthy in place portfolio produced strong revenue and a S. S O per share growth and our sector leading dividend increase.
This excellent performance was the direct result of the hard work by the Getty team, who embraced the challenge to accelerate our growth despite precarious and at times unpredictable market conditions.
The net result of our record investment activity was an annual total revenue increase of 12.2%.
And when you factor in our effective capital markets execution, a S. F O per share grew five 1% for the year ended 2023 meeting the high end of our revised guidance range.
We think these would be strong results in any given year, but I'd argue they were exceptional in light of all of that transpired in 2023.
Our performance was driven by our focused strategy and the competitive advantages. We believe we've developed over many years in our space with.
But the backdrop of volatile transaction markets, we remained disciplined and rely on our core principles, including prioritizing relationships and being experts in our transaction markets.
Our tenants are often making a long term financing decisions I rely on us to effectively structure and close transactions on a timely basis irrespective of where we are in the economic cycle.
To that end, we strengthened our relationships with existing tenants and aggressively pursued new business with both mature and emerging retailers.
We also leaned heavily on our knowledge of the underlying sectors, we invest in in our database of thousands of previously underwritten properties to make us smarter investors.
Notably we continued to add newly built stores, which we refer to as new to industry or MTI locations to our portfolio.
And in 2023, approximately 80% of our investments were for these N T I sites.
From an operations standpoint, we believe it benefits our portfolio to acquire a state of the art new bells that reflect the latest tenant prototypes, including increased store sizes prominent branding the latest technology and in certain cases drive through lanes.
And from an investment perspective, we leveraged our expertise to carefully underwrite each opportunity.
Appropriate rents limit our gross capital outlay, and ultimately acquire these assets either at or below their construction cost.
Another core principle at Getty is the concept of continuous improvement with respect to our operations.
We took two important steps on this front in 2023.
First we realigned some of our team for an increased focus on our investment program in order to better align with our growth plans. We now have more than one third of the company is focused on sourcing underwriting and negotiating and closing acquisition opportunities.
We also launched a multiyear technology initiatives to ensure that we have the systems in place to support a larger platform and to make us more efficient and better investors.
The initial phases of implementation will go live in early 2024.
As we enter this year Getty is well positioned for the current environment given the essential nature of our assets the operating strength of our institutional tenant base.
Our distinctive sourcing and underwriting capabilities and our strong balance sheet.
We expect our 2020 for earnings growth to be driven by the escalators from our in place portfolio. Additionally income from investments acquired are partially funded in 2023 and by our investment pipeline, which currently includes more than $67 million of assets under contract. The majority of which are projected to close in the first half of this year.
Our target retail sectors continued to be healthy as evidenced by the resilience of the U S consumer and operators in the convenience and automotive retail space are pursuing a variety of growth strategies to meet consumer demand.
Although our investment volume in 2024 will ultimately depend on market conditions, including sellers' expectations regarding rates and their willingness to transact.
We think our relationships underwriting expertise on liquidity will serve us well as we source and diligently underwrite opportunities to acquire new convenience in automotive retail assets.
We remain confident in the strength of Getty has in place portfolio and our ability to create value for earnings growth and portfolio diversification.
And with that I'll turn it over to mark to discuss our portfolio and investment activities.
Thank you Chris.
As of the end of the year our lease portfolio included 1089 net lease properties and two active redevelopment sites. Excluding the active redevelopments occupancy was 99, 8% and a weighted average lease term was eight nine years, our portfolio spans 40 States plus Washington D C.
With 60% of our annualized base rent coming from the top 50 Msas.
77% coming from the top 100, Msas are rents are well covered with a trailing 12 month tenant rent coverage ratio of 2.6 times.
Turning to our investment activities for the year, we underwrote a record $6 8 billion of potential investors.
Continuing with the themes of portfolio growth and diversification convenience stores represented approximately 45% of our underwriting with the remaining 55% being focused on other convenience in automotive retail property types, including Express Express total car washes auto service centers.
Primary tire stores oil change locations and drive through quick service restaurants.
We had a strong quarter in which we invested $61 8 million through sale leasebacks or development funding transactions, bringing our full year investments to a record $326 3 million.
Highlights of this quarter's investments some of which include amounts funded in prior periods include the acquisition of.
Two convenience stores located in the Charleston, MSA for $12 9 million.
12 Auto service center properties located throughout the southeastern U S for $27 8 million.
To express Tal Carwash is located in the Cleveland and Jacksonville, Msas for $10 6 million.
And two under construction car wash properties for $6 2 million as part of this acquisition, we will provide additional funding during the construction period to complete these projects.
We also advanced incremental development funding in the amount of $24 5 million for the construction of 20, new to industry car washes and auto service centers.
These assets are either already owned by the company or are under construction or will be acquired via sale leaseback transactions at the end of the project's respective construction periods.
Yeah.
For the fourth quarter.
Aggregate initial cash yields on our investment activity was nearly 8% and a weighted average lease term for the acquired properties was 15 years.
For the year ended 2023.
$326 3 million of investments included the acquisition of 40 Express tunnel car washes.
13 Auto service centers 12, convenience stores and three drive through quick service restaurants.
The weighted average initial yield yield lease term for these acquisitions was 17.2 years and the average initial cash yield for all investments was approximately seven 3%.
Subsequent to the yearend, we invested $18 6 million for the development <unk> acquisition of Knight expressed Hello, Carwash is eight auto service centers in one convenient stores.
We currently have more than $67 million of commitments to fund acquisitions and developments, which we expect to spend over the next six to nine months at an average initial yield in the mid 7% range, which is reflective of the mix. It more recent originations similar to the yields we achieved in the fourth quarter and lower yields on some of.
Our older originations.
The market for our property types can say continues to adjust to the changed rate environment remains challenged.
While we were able to deploy capital in 2023 at materially higher yields in the prior year and are currently offering of transactions in the 8% range. It is clear that these pricing levels.
Have many sellers reevaluating their needs to transact in the near term.
With the expectation that there will be rate cuts in the second half of 2024, whereas any decline in overall transaction activity in our retail sectors. Thus far this year.
Despite this temporary market dislocation Getty is positioned in the Mark remains unchanged. We believe the market will adjust to the changing economic landscape and will stabilize as our tenants look to continue growing your businesses.
We remain disciplined in our underwriting and focused on our investment strategy, which prioritizes direct transactions with both growing and establish operators.
We believe this strategy will afford us the opportunity to work with our tenant partners as the market evolves.
Ultimately, we expect that we will be able to identify accretive investments as we move throughout the year.
Moving to our redevelopment platform during the quarter, we invested approximately 300000 and projects were in various stages in our pipeline.
We completed one redevelopment project were recognized that an automotive parts store in Brooklyn, New York, which is leased to autozone.
We invested a total of approximately $1 2 million in the project and generated incremental return on invested capital of nine 3%.
We also completed the renovation of the convenience store property in Connecticut, We invested 450000 in this project and return for increase Red hat and extended lease term.
We ended the quarter with three signed leases for redevelopment projects are seeing renewed interest from retailers, who expansions plans overlap with our footprint in our portfolio.
We expect to continuously complete projects over the next few years.
Turning to asset management activities for the fourth quarter, we sold four properties, realizing $7 2 million in gross proceeds and exited one lease property.
For the year, we sold nine properties, realizing $11 9 million in gross proceeds and exited five lease properties.
With that I call that I turn the call over to Brian to discuss our financial results.
Thanks, Mark good morning, everyone.
Last night, we reported <unk> per share of <unk> 57 cents for Q4 2023, representing an increase of three 6% versus the <unk> 55 per share we reported in Q4 2022.
<unk> net income for the quarter were 51 cents and 30 cents per share respectively.
For the full year 2023, <unk> per share was $2 25, representing an increase of five 1% over the $2 14 per share we reported in 2022.
<unk> net income for 2023 were $2.06 and $1.15 per share respectively.
I, mostly focus on our full year 2023 results from here I'll be happy to answer any questions on the quarter during Q&A.
Our total revenues for the year were $187 $1 million representing year over year growth of 12, 2% versus 2022.
Base rental income, which excludes tenant reimbursements GAAP revenue adjustments and any additional rent increased by nine 5% to $161 $8 million.
Away from the income statement I'd highlight that our annualized base rent of $172.8 million as of December 31st was up 12, 1% from the $154 $1 million. We reported at the end of 2022. This is one of the largest year over year increases we've achieved an AVR and we think reflects the efforts we've made.
To scale the platform.
This growth was driven primarily by our strong acquisition activity as well as recurring rent escalators in our leases and rent Commencements are completed redevelopment projects.
On the expense side total G&A cost increased 15% to $23 $7 million in 2023, excluding stock based compensation G&A increased by eight 9% to $17 $2 million.
The increase in G&A was primarily due to personnel costs, including some nonrecurring retirement expenses as well as higher professional fees, including audit tax and legal expenses.
We also made certain platform investments in 2023, including at our people and technology systems, which we expect to benefit from starting as early as this year.
We anticipate the G&A increases will moderate and G&A as a percentage of our revenue and asset base will decrease as these investments mature and we continue to scale the company.
Property costs increased 10, 4% to $23 $8 million in 2023, primarily due to higher Reimbursable real estate taxes <unk>.
Excluding reimbursable expenses property costs decreased by 11, 4% to $4 $3 million as we.
<unk> reduced rent expense by exiting lease properties.
Environmental expenses, which are highly variable due to a number of estimates and noncash adjustments were $1 $3 million in 2023 recall that 2022 included the removal of reserves for unknown environmental liabilities, which is the primary driver of the significant change environmental expenses versus 2022.
Turning to the balance sheet and our capital markets activities. We ended the year with $760 million of total debt outstanding. This consisted primarily of $675 million of senior unsecured notes with a weighted average interest rate of three 9% and a weighted average maturity of six and a half years.
We also have a $75 million unsecured term loan outstanding at a six 1% interest rate and $10 million drawn on our 300 million dollar unsecured revolving credit facility.
Yes.
Okay.
As of December 31st.
Net debt to EBITDA was four nine times and total debt to total capitalization was 34% while total indebtedness to total asset value as calculated pursuant to our credit agreement was 35%.
Taking into account unsettled forward equity net debt to EBITDA would be approximately four seven times.
Moving are moving to our equity capital markets activities. During the fourth quarter. We settled 1.25 million shares of common stock that was subject to outstanding forward sale agreements in connection with our February follow on.
This generated approximately $40 $6 million in net proceeds.
In addition, during the fourth quarter, we entered into new forward sale agreements under our ATM program to sell approximately 800000, 800000 shares which will generate anticipated gross proceeds of $24 $6 million.
At year end, we had a total of approximately $1 1 million shares of common stock subject to outstanding forward sale agreements, which upon settlement are anticipated to raise gross proceeds.
Proximately $32 2 million.
Returning to our $67 million committed investment pipeline as Chris mentioned these transactions are fully funded through a combination of proceeds from our outstanding forward equity agreements and the remaining $75 million available to us under our delayed draw term loan.
Pro forma for these investments and capital activity, we expect our balance sheets remain well positioned to support continued growth.
I'd note that since 2016, we've acquired more than $1 $2 billion of new assets, while effectively managing our balance sheet and maintaining leverage near the midpoint of our target range of four five to five five times net debt to EBITDA.
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 continuing to maintain these leverage levels and our investment grade profile.
With respect to our environmental liability we ended the year at $22 $4 million, which was a reduction of approximately $800000 since the end of 2022.
Our net environmental remediation spending 2023 was approximately $5 $7 million.
And finally, we are reaffirming our 2024 <unk> per share guidance range of $2.29 to 2031 cents, which we introduced.
Used earlier this year 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 2024.
Primary factors impacting our <unk> guidance include variability with respect to certain operating expenses youll pursue cost and the timing of anticipated demolition costs for redevelopment projects, which run through property costs on our P&L.
With that I'll ask the operator to open the call for questions.
Thank you 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 can you.
You May press star two if you'd like to remove your question from the camp for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys are.
Our first question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Good morning, this isn't our Nike Gary Andre Todd Thomas just a quick one from me so what.
What is the initial yield on the committed investment pipeline and are you seeing any noticeable change in the yields for the pipeline relative to the cap rate discussed previously.
Yeah. Good morning. This is Brian so it's right in the mid Sevens right around seven 5% and I think as as Mark mentioned in his remarks currently reflects a blend of some transactions that were originated 12 18 months ago. Some of our development funding transactions that are.
At yields are slightly less than that as well as well as some new originations over the last couple of months, which would be.
North of that and in the 8% area as Mark articulated we're putting out new paper today. So it's really a blend of some old originations and the yields we're seeing more recently.
Okay, and just one more so what is your capital plan. As you look ahead to 2024 I know guidance doesn't include any future capital raising activity, but you have an undrawn term loan and unsettled forward equity. So how should we think about additional capital raising activity throughout the year, given where your cost of capital sits today.
Sure.
Yeah, I think you're largely answered it in your question right. So we have north of $105 million from those two sources against a $67 million pipeline. So we have dry powder.
Right from those two committed sources as well as the revolver, that's effectively undrawn with $290 million of of availability. So we feel really really good about how we're positioned against the current pipeline.
We're seeing beyond that and honestly like it is most years as we move through the year it'll be pipeline dependent and capital markets dependent as we continually look to match fund our activity and do it accretively.
Okay. Thank you.
Okay.
Thank you. Our next question comes from the line of Mitch Germain with citizens JMP Securities. Please proceed with your question.
Thank you and congrats on a 2023.
Chris You mentioned some tech initiatives.
I'd Love if you could maybe just kind of provide some perspective there and.
Is this going to create a little bit of a drag on G&A temporarily as you get the system up and running.
Yeah, I mean, I think I'd highlight two things right. So as we've we've grown the business.
Certainly put a lot of emphasis on making sure we have the right people here at Getty we.
We did a lot of work this year in terms of bringing some new people into the organization I guess, it's all around helping us originate underwrite negotiating and ultimately close transactions. So we feel really good about those investments and the technology really dovetails with with all of that is making us more efficient for underwriting standpoint is.
It make us more efficient from an accounting standpoint data management.
And we did invest some in 2023, we expect to have some does 24, but I think what's really important.
Brian mentioned as you know we've made a lot of platform investments at Getty, whether it's people are in the technology area and we are getting to a place where we're starting to see the benefits of size and scale. So are we.
Believe that our G&A increases will start to moderate as we look at 2024 and beyond even including some of those investments.
So I think we started to come on this going into last year and years. Prior that we we always try and extract as much value out of the total transaction as possible.
<unk> escalators.
<unk> to lean more towards the 2% per annum.
And our standard document.
So yeah, I think we've been able to extract value.
In addition to you know the total initial cash returns that we always reference.
Great last one for me.
I know you've got a couple of redevelopment opportunities aren't going in it seems like most of your redevelopment at least historically has been.
Taking a.
Our property and making it into some sort of different use.
I'm curious given the fragmentation of the C store in auto industry, given so many single operators as they look to whether it be improve their inside offerings. Ed you know kind of EV charging whatever it might be does that create a redevelopment opportunity for you or is that creating more of a.
Acquisition opportunity for you.
I think we saw you saw this quarter and it was in Mark's remarks, we have in the past invested in properties in our portfolio that are already subject to a lease with <unk>.
Revenue enhancing capex projects, where someone's looking to either build a bigger C store or completely renovate a smaller store and increase its size and product offerings.
I think thats certainly an opportunity right you can see where the industry is headed.
Our tenants are very focused on having the modern C store, which is food and beverage.
Yeah.
The market and the size of the property or are there then I think getty, we'd be happy to invest for a return.
With our existing tenants there and then just to touch on the broader redevelopment matches, we actually have done a number of complete redevelopments.
Four properties that were older format stores that are now a brand new state of the art Newbuild.
Great. Thanks, Good luck this year.
Thank you.
Thank you. Our next question comes from the line of Joshua deadline with Bank of America. Please proceed with your question.
Hi, this is about granite that'd be half cash assuming where the market are you seeing the best.
Pricing opportunity I think last year, you made a permanent Bal convenience stores are you seeing anything I guess, even getting close here.
Our car washes.
Yes, I think pricing in general.
Moved across all asset classes last year.
And.
As Mark mentioned, we're putting out offers across.
All the sectors that we focus on that are in the eighth at this point in time I really think.
We mentioned earlier the amount of weight ultimately deploy this year will depend not only on tap.
Seller's willingness to transact.
Certainly there.
The view that there will be rate cuts in 2024.
The question is when and by how much but thats certainly going to impact what I think market cap rates will be as we progress through 2024 and overall transaction volumes.
Okay and then this may be a little repetitive comments you just made about theme.
<unk> kind of a trend. That's currently for transaction volumes are going to be pulling back that something that you could most likely.
At least even expect going trail just dependent on your current pipeline and what Youre seeing.
Yeah, I think you know.
From our perspective, the beauty of the sale leaseback that direct nature of our transactions as we think we are in the team that we've put in place. We think we're set up to now.
Another year of strong investment volumes again, where we're underwriting.
We're staying in front of our existing relationships and building, new but new business relationships right. It's just a matter of does it make sense to transact and at what levels from our perspective, we have a view of value we have our underwriting model.
Certainly.
About finding opportunities that work for both parties and again, we think that they are out there and that will we will continue to transact doesn't 24, but the ultimate volume will depend on a lot of factors this year.
Great. Thanks, so much.
Thank you. Our next question comes from the line Kiln counter party with J P. Morgan. Please proceed with your question.
And then have you been occurred from JP. Morgan first question can you discuss trends in the guide one business and risk I don't supply given the popularity and that's got to be the last few years.
Yeah, I think again the car wash sector right you had several years of explosive growth. There was a lot of M&A a lot of new capital coming in probably 2021 to 22 in particular.
We've spoken to a lot of our larger relationships in the sector over the course of 2023 I think the biggest trends, we're seeing right. Our memberships continue to be quite strong.
In most cases I think membership revenue was probably around two thirds, if not more of overall top line.
With that said car washes are not immune to what's going on in the broader economy I think.
Drive up visits right are where our tenants are seeing some softness at this time.
What that translates to is.
Instead of maybe focusing on larger M&A transactions right. Our tenants are selectively evaluating growth, but they're really focused on operations and pricing and bringing a lot of those new bills right faster along in terms of getting up to maturity right to stabilize their business generate more income for that so we're still.
Sorry.
Excited about the car wash sector, we're excited about our relationships in that sector.
In this.
Causing a lot of the health of our operators there but.
But certainly it's a consumer facing business and.
Yeah, they're they're they're working through their their operational improvements in.
We're there to support our relationships.
Understood.
One last question it looked like.
Costs were fairly modest in <unk>, how does this look like in plenty of anti fraud, and how does it he wound down depth at 11 that Steve.
Sorry can you repeat that will cost.
And we don't mind costs.
Oh.
Yeah.
In short form right. Environmental is included is comprised of some cash cost excuse me that we incur to run the program right. There's some insurance premiums and their legal professional fees. That's typically been recently around $1 million a year that would be kind of the flow through to <unk>.
But broad strokes and then kind of round numbers, there and we expect that that's probably the right level for at least the foreseeable future.
And that Theres, a lot of activity noncash nonrecurring estimates changing that's typically the noise.
That's in our net earnings and <unk> number, but that we we adjust out for <unk>. So we would have you focus on kind of those cash cost to manage the program and it's been running about $1 million a year.
Got it thank you for taking the questions.
Yeah.
Thank you as a reminder, its star one to join the question queue.
Our next question comes from the line of Alex <unk> with Baird. Please proceed with your question.
Hi, Good morning, and thank you for taking my question first off May provide some additional color on the increase in tenants who are in that onex to $2 49 X rent coverage.
Yeah sure that's more of a it's Brian.
We have it.
Particularly in that strata as it were we bring sites into our analysis.
After they are opened for 12 months, although I think our operators would tell you. Most sites are up to three years in terms of the stabilization period.
So that is actually the increase in that.
That bucket as it were for this reporting period as we did have some some new builds both in the C store space and particularly in the car wash space that just came into our analysis and so they are still in their ramp up phase, but theyre hitting that that bucket is as it relates to how we distribute the brand coverage.
Got it that's helpful and secondly has there been any change in the demand for development funding.
Their existing or new relationships, and what kind of investment spreads does getty need to execute on those deals.
Yeah. This is mark so the demand for development funding remains strong as source of capital for those new new bills, Chris emphasized in his remarks about the benefits of adding new to industry.
Units into our portfolio.
And it remains it remains a very active.
That product and are.
Adoption for our growing tenants.
Relative to other sources of capital.
You know, we do see a modest premium for the forward commitment of development funding. It's it's a longer duration as you've seen in some of the hangover deals in our blended cap rate from earlier than last year. So we have a model a modest premium over a typical sale leaseback.
That is highly dependent upon a point in time and how far out that.
That's our commitment.
Might entail.
Thank you.
Sure Doug.
Okay.
Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr constant for any final comments.
Thank you operator, and thank you all for being part of our call. This morning. We appreciate your interest in Getty and we look forward to getting back on with you We report the.
First quarter of 2024 in late April.
Yeah.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.