Getty Realty Corporation

Good morning and welcome to Getty Realty's earnings conference call for the first quarter of 2021. 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 first quarter earnings conference call. Yesterday afternoon, the company released its financial results for the quarter ended March 31, 2021. The Form 8K and earnings release are available in the investor relations section of our website at gettyrealty.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 2021 guidance and may also include statements made by management in their remarks and in response to questions, including regarding the company's response to the COVID-19 pandemic, future company operations, and financial performance and the company's acquisition or redevelopment plans and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual results could differ materially. I refer you to the company's annual report on Form 10-K for the year ended December 31, 2020 and other 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 reliance on forward-looking statements which reflect our view only as of the date hereof. The company undertakes no duty to update any forward-looking statements that may be made in the course of this call. Also, please refer to our earnings release for a discussion of our use of non-GAAP financial measures, including our definition of Adjusted Funds from Operation, or AFFO, and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive Officer.

Thank you, Josh. Good morning, everyone, and welcome to our first quarter of 2021 earnings call. With Josh and me on the call today are Mark O'Lear, our Chief Operating Officer, and Brian Dickman, our Chief Financial Officer. I will begin today's call by providing an overview of our performance for the first quarter of 2021, touch on our strategic objectives for the remainder of the year, and then we'll pass the call to Mark and Brian to discuss our portfolio and financial results in more detail. We delivered another quarter of solid results as our net lease portfolio and our tenants' operating businesses continued to display the strength and stability that we saw throughout the prior year. We had no issues with rent collections this quarter, including collecting small amounts of rent, which we agreed to defer in 2020. We view the strength of our collections as a continuation of recent quarter's performance, as our business was quite strong throughout all of last year. The net result of our stable in-place portfolio and the continued execution of our investment strategies was a 5.4% increase in total revenues 8.6% increase in our adjusted funds from operations and a 2.2% increase in our AFFO per share. We also continued to execute on our growth strategy during the first quarter as we invested a total of $30.3 million in a combination of sale lease tax and construction funding for new to industry locations. Our investment activity for the quarter was again focused on both the convenience store and car wash business. In addition, our team continues to source and underwrite numerous opportunities in the convenience and auto-related sectors, and we are encouraged by the number of attractive opportunities we are reviewing in our investment pipelines. As we look ahead, we remain focused on three primary areas. The first is maintaining a healthy portfolio and high rent collections. We are pleased with the continued performance of our C-Store and auto-related tenants, as evidenced by our steady and strong rent coverage ratios. The asset classes included in our portfolio have proven to be resilient and growing despite the impact of the pandemic. With that said, we will continue to monitor tenant health and the impact of the COVID-19 pandemic on our portfolio and the economy. Our second priority as we move through this year is executing our initiatives to grow, evolve, and enhance our portfolio. by making accretive acquisitions of convenience stores and other automotive-related retail assets, by unlocking embedded value through selective redevelopments, and by maximizing the quality of our in-place portfolio through continued active asset management. We are confident in our targeted investment asset classes and believe that acquiring high-quality real estate in metropolitan markets across the country will continue to drive additional shareholder value. Finally, we remain committed to maintaining our stable and flexible balance sheet. We ended the quarter with significant availability on our revolving credit line, and during the quarter we filed the new $250 million ATM program, both of which we believe provide us with access to capital to grow our company while maintaining a well-laddered and flexible capital structure. With that, I will turn the call over to Mark to discuss our portfolio and investment activity.

Thank you, Chris. As of the end of the quarter, our portfolio includes 949 net lease properties, six active redevelopment sites, and five vacant properties. Our weighted average lease term is approximately 9.1 years, and our overall occupancy, excluding active redevelopments, increased to 99.5%. Our portfolio remains spread over 35 states plus Washington, D.C., And our annualized base rents, 65% of which come from the top 50 MSAs in the U.S., continue to be well covered as our trailing 12-month tenant rent coverage ratio increased 2.7 times. In terms of our investment activities, we had an active start to the year. During the quarter, we invested $30.3 million in nine properties. Our completed acquisitions during the first quarter stem from acquisition leaseback transactions with three separate tenants operating in the express tunnel car wash business. We acquired one site with Zips Car Wash in the Louisville, Kentucky MSA for $4.8 million, one site with Go Car Wash in the San Antonio MSA for $3.1 million. In addition, we completed our first sale leaseback with Whitewater Express, where we acquired four properties in Ohio and Kentucky for an aggregate purchase price of $13.9 million. All of the acquired properties are subject to triple-net leases with 15-year initial terms, and our aggregate initial cash yield on the six sites acquired was slightly more than 7%. Getty also funded $8.4 million construction loan for three new-to-industry convenience stores with Refuel, a 90-unit C-store operator with locations across the southeastern U.S. As part of this transaction, we will prove interest on our investment during the construction phase of the project. We expect to acquire the properties via sale leaseback transaction at the end of the construction period. We ended the quarter with a strong investment pipeline and remain highly committed to continuing to grow our portfolio in terms of both the convenience store industry and other automotive-related retail assets. We expect that we will pursue direct sale leasebacks, acquisitions of net lease properties, and funding for new industry construction. Finally, we remain committed to our core underwriting principles of acquiring high-quality real estate and partnering with strong tenants in our target asset class. Moving to our redevelopment platform, during the quarter, we invested approximately $100,000 in sites which are in our pipeline. At this time, we have 11 signed leases or letters of intent, which includes six active projects, four signed leases on properties which are currently subject to triple net leases, but which have not yet been recaptured from the current tenants, and one signed letter of intent on a vacant property. We expect to have rent commencements at several sites during 2021. On the capital spending side, we have invested approximately $1.9 million in the 11 redevelopment projects in our pipeline and estimate that these projects will require a total investment by Getty of $7.5 million. We project these redevelopments will generate incremental returns to the company in excess of where we could invest these funds in the acquisition market today. For more detailed information on the redevelopment pipeline, please refer to pages 14 and 15 of our investor presentation, which can be found on our website. Turning to dispositions, We sold five properties during the quarter, realizing proceeds of $8.4 million. Three of the properties sold, representing a vast majority of realized proceeds, were previously leased to a local developer, and the remaining two sites were vacant. We expect the net financial impact of these dispositions will be minimal. As we look ahead, we will continue to selectively dispose of properties where we have made the determination that the property is no longer competitive as it convenes their location and does not have redevelopment potential. With that, I will turn the call over to Brian to discuss our financial results.

Thanks, Mark. Good morning, everyone. I'll start with a recap of earnings. Hopefully, you've all had a chance to see yesterday's release. AFFO, which we believe best reflects the company's core operating performance, was 47 cents per share for the first quarter, representing a year-over-year increase of 2.2%. In addition, FFO share for the quarter. Our total revenues in the first quarter were $37.3 million, representing a year-over-year increase of 5.4%. Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables, grew 6.7% to $33.5 million. Acquisition activity, rent escalators in our leases, and the completion of redevelopment projects all contributed to the growth in our On the expense side, property costs increased in the quarter, primarily due to increases in reimbursable real estate taxes. Environmental expenses also increased this quarter as a result of non-cash changes in environmental remediation costs and estimates. The portion of environmental expenses which flowed through to our AFFO were down quarter over quarter as a result of lower professional fees and related expenses. As we note each quarter, environmental expenses are subject to a number of estimates and non-cash adjustments and will continue to be highly variable. Finally, G&A expenses increased this quarter as well, due to non-recurring retirement costs, as well as other employee-related expenses and certain professional fees. As we turn to the balance sheet and our capital markets activities, we ended the quarter with $525 million of debt outstanding, comprised entirely of long-term fixed-rate unsecured notes. Our $300 million revolver was completely undrawn at quarter end. Our weighted average borrowing cost was 4.2%, and the weighted average maturity of our debt was 7.3 years. In addition, our total debt to total market capitalization was 29%, our total debt to total asset value was 38%, and our net debt to EBITDA was five times. We have no debt maturities until June of 2023, other than our credit facility, which matures in March of next year, but has a one-year extension option at our election. With respect to our ATM program, we were selective with our issuance during the quarter, ultimately raising 20.8 million at an average price of $28.03 per share. As we look ahead and think about our capital needs, we remain committed to maintaining a conservative, well-nattered, and flexible capital structure. With respect to our environmental liability, we ended the quarter at 48.7 million, which was an increase of 600,000 from the end of 2020. For the quarter, net environmental remediation spending was approximately $600,000. Finally, we reaffirmed our 2021 AFFO per share guidance at a range of $1.86 to $1.88 per share. Our guidance includes transaction activity to date, but does not otherwise assume any potential acquisitions or capital markets activities for the remainder of 2021. Specific factors which may impact our guidance this year include the impact of our 2020 and first quarter 2021 investment and capital raising activities, our expectation that operating costs will generally continue to increase, our expectation that we will forego rent when we recapture properties for redevelopment, and our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses for deals ultimately not completed. With that, I will turn it back to Chris.

Thank you, Brian. That concludes our prepared remarks, so let me ask the operator to open the call for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For those 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. The first question is from Michael Gorman from BTIG. Please go ahead.

Thanks. Good morning. Chris, I was wondering if you could talk a little bit about what the environment is like right now on the tenant side in terms of Are you seeing continued moves towards consolidating the CSOR space and how that plays into how your acquisition pipeline looks like or what your acquisition pipeline looks like over the balance of the year?

Well, sure. Maybe I'll comment on that and then add something as well, which is I think the convenience store industry will continue to consolidate as it has been over the last several years. You know, the reality is with the C-store evolving and becoming more, you know, part merchandise, part quick serve restaurant, part coffee shop, you know, the operations are incredibly sophisticated. And when you add loyalty programs and apps on top of that, you know, there are small to mid-sized operators, right, that probably are not willing to or maybe cannot compete with some of the larger chain stores. So you're going to continue to see continued consolidation, whether it's a small player selling to a regional player or even some of the more national transactions that you've seen over the last couple of years. The other thing I would add, Mike, which is probably not related to your question, but what we're also seeing is that there are a number of, call it medium to larger size chains that are also, quite frankly, building their own locations and growing organically, you know, in their target markets or in adjacent markets. And, you know, we think that's also a source of potential transactions for Getty, you know, as these operators are looking to source capital, right, to fund organic growth as well as M&A growth.

That's great. Actually, yeah, feeds right into my next question about the construction loans during the quarter. I'm curious if you could spend a little bit more time talking about kind of how you source those, how you underwrote those, and maybe some what kind of additional opportunities, as you kind of just mentioned, there are for either funding new development through construction loans or maybe even taking your redevelopment skill set into ground-up development? Can you just kind of lay out the field of opportunity there?

Yeah. So, dovetails to what I was just saying a moment ago. We've done this in a couple of transactions before, right, where we have been effectively a development partner with a tenant where they have identified a site to do their prototype new build program. So in this case, Refuel is a large operator across the southern U.S. They've got a new store program and they're looking for capital to help them fund along the way. And the way our agreements are structured is we anticipate buying the location upon completion. Again, it's important to Getty right at the end of the day that we become the fee owner of the property. But if there's a way for us to partner with an operator and help fund their organic growth, I would certainly think that's an opportunity for us in this case, but in others as well.

Great. And then maybe just last one for me. In your conversations with your tenants, any kind of updated thoughts on the relationship between you know, what's been going on with convenience store sales, which seem to be pretty strong, and then what's going on on the gas side of things and whether, you know, I think historically it's been kind of that 50%, maybe 60% range of C-store sales don't involve a gas transaction. Is that changing at all?

It is gradually increasing, right? So we have a stat in our investment materials that says approximately 50% of customer visits are non-gas-related visits. You know, anecdotally in conversations with our tenants, we have seen that 50% number growing, right? And it does vary by industry. Certainly if you're in an area that's maybe more suburban or maybe more spread out, right, you're seeing more visits and sometimes the same customer visiting multiple times per day. And I think it's a trend that will continue as the convenience store becomes your morning destination. your evening destination for dinner. You know, that's what our tenants are focused on is driving customer visits for food and traditional merchandise when consumers do not need to stop for gas. Excellent. Thanks for the time.

The next question is from Todd Thomas from KeyBank. Please go ahead.

Hi, thanks. Good morning. Just first question for Brian. In terms of the guidance, which does not include future investments, you know, you closed $22 million at a slightly more than 7% initial yield. You extended some construction financing. I was just curious, you know, what the offset was, you know, with the guidance range, the AFFO being, you know, affirmed. you know, what the offset was relative to the investments that were completed during the quarter.

Yeah, morning, Todd. A fair question, as we obviously did have some, you know, investment activity in the quarter. It was really the ATM issuance And, you know, I can't say that we were, you know, active outwardly in the market during the quarter, but there were a couple of opportunities, you know, that were brought to us that we felt made sense to transact on. You know, as you weigh the different considerations of issuing equity, we thought that made sense for us. particularly over the long term, acknowledging that it does put a little bit of short-term pressure on the earnings per shares number and AFFO per share. But the short answer to your question was the equity issuance, and we felt that was the right thing to do, notwithstanding the impact on the per share numbers.

Okay. And then just back to investments, I was just curious if there's an update and if you can comment at all regarding the CouchTar process, the Circle K portfolio, and Getty's interest in those assets?

Yeah, there's not really any update or any thoughts that I can provide at this time.

Okay. And what about the disposition outlook? What's that look like? Should we expect more near-term asset sales? I mean, how should we think about dispositions as we move forward throughout the year?

Yeah, sure. If you look at our recent, in the past two or three years, we've certainly been a seller of, you know, call it 10 to 15 properties a year. You know, typically some of those properties have been in some of our vacancies. Some of those properties were coming out of leases or the lease term was expiring. You know, I think that's a good run rate for Getty. You know, we don't see significant differences from

Okay. All right. Thank you.

The next question is from Nikita Veli of JP Morgan. Please go ahead.

Good morning, guys. Did you provide yields on these loans that you guys have advanced? These construction loans? Just curious.

Unfortunately, we can't disclose the exact yield on that. But, you know, what I'd say is that the – interest rate during the construction period is certainly consistent with where, again, he's been investing over the last several years.

Also, it's consistent to the cap rates. And my second question was, what do you think the expected cap rate will be down the line when you eventually do acquire those properties?

Again, I can't really provide specific numbers, but I would guide you to the range of cap rates we've quoted in the past.

Got it. Okay. And on the deal pipeline, I know you talked a little bit about that. In terms of just put some numbers and brackets around it, you have been a little bit more consistent in the recent quarters with the deal volume. Do you think that $30 million to $40 million, $15 million of deals per quarter is a realistic number that you think you aspire to and over time can put forward that on a consistent basis?

Yeah. I'm not going to provide a specific number, but what I would say is it's been one of our goals to become more of a consistent acquirer, right, and to add a number of resources in Mark's group, right, to help with that. And I think our results have shown that we've certainly been acquiring at a steady pace over the last several years, and we expect that to continue.

All right. Last question, if you don't mind, you did some car washes in the quarter. Can you just talk a little bit about how big of an opportunity that is as a percent of your total deal pipeline currently?

Sure. This is Mark. I think it's growing to the point as we expand our relationships and develop new opportunities in the space. It's a highly fragmented industry, which is receiving a lot of attention for consolidation right now. And I think it will grow to be somewhat equal to or near the opportunity set for convenience stores. And, you know, right now we're still probably slightly weighted towards convenience stores, but not only in car wash, but in all the other automotive experience retail sectors where, you know, we're working to grow the pie as big as possible for opportunities for acquisitions and investments in all those retail verticals.

No, thanks, guys.

This concludes the question and answer session. I would like to turn the call back over to Chris Constant for closing remarks.

Great. Thank you, operator. We appreciate everyone joining us this morning for our first quarter call. Thank you for your interest in Getty, and we look forward to getting back on with everybody at the end of the second quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.