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spk01: 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. Dicker.
spk10: 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 30, 2023. 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 that differ materially from those described in the forward-looking statements. Examples of forward-looking 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 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 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 day 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-GAF financial measures including our definition of adjusted funds from operations or AFFO and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constance, our Chief Executive Officer.
spk07: 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 O'Lear, 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, and Brian will further discuss our financial results and guidance. In the third quarter, we produced strong AFFO per share growth of 5.6%, and for the nine months ended September 30th, our AFFO per share grew a healthy 5.7%. This growth continues to be driven by our robust investment activity and thoughtful capital markets execution. Year-to-date, we have surpassed the company's 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 tunnel car washes, all of 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 and our 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 creative investment spreads, support a committed 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 convenience and 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 repeat business, 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 and who 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 a significant knowledge of industry trends, and with tenants we know well, but have 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 property. For Getty specifically, we believe prospective tenants who are often making long-term financing decisions related to M&A or development are in the process of reevaluating their capital structures to reflect less access to capital and lower values attributable to real estate financing. 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 4.7% in our recurring quarterly dividend to 45 cents 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 a stable payout ratio and continues to increase Getty's 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 ASFO guidance by a penny to $2.24 to $2.25 per share. Getty is well positioned for the current environment, given the essential nature of our the operating strength of our institutional tenant base, and our well-positioned balance sheet, including 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, 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.
spk09: Thank you, Chris. At the end of the quarter, our lease portfolio included 1,074 net lease properties and three active redevelopment sites. Excluding the active redevelopments, occupancy was 99.7%, and our weighted average lease term was nine years. Our portfolio spans 40 states plus Washington, D.C., with 61% of our annualized base rent coming from top 50 MSAs and 79% coming from top 100 MSAs. Our rents are well covered with trailing 12-month tenant rent coverage ratios of 2.7 times. Turning to our investment activities, we had a record quarter. So Getty invests $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 convenience stores located in Las Vegas and various markets across Texas and the Southeast for $55.1 million. nine car wash properties which are located through the U.S. for $48.5 million, two drive-thru quick service restaurants and an auto service center for a total of $3.5 million, and nine under-construction car wash properties for $31.5 million. As part of this acquisition, we provide additional funding during the construction period to complete these projects. We also advance incremental development funding in the amount of $16.6 million, including crude interest for the construction of 20 new-to-industry car washes, giving stores and 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 respective construction periods. For the third quarter, the aggregate initial cash yield on our investment activity was approximately 7.2%. and the weighted average lease term for acquired properties was 17.2 years. Subsequent to quarter end, we invested an additional $3.3 million towards the development of an express tunnel car wash property. Cumulative result of our year-to-date investment activity is $269 million deployed at initial cash yield of approximately 7.2% 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 for the next six to nine months at an average initial yield of approximately 20 basis points in excess of our investment activity year to date. From a market perspective, in many cases, we are now submitting offers that are approaching 150 basis points more than where we transacted in 2021 and 2022. The amount of cap rate expansion, combined with the short duration in which these moves in asset pricing have occurred, has caused many sellers to pause. We believe the market will adjust to the changed economic landscape and will stabilize as sellers evolve and modify their expectations. The direct nature of our investment strategy affords us the opportunity to discuss these changes directly with the decision makers and we believe that we can continue to identify creative investments as we move through the remainder of 2023 and into 2024. Moving to our redevelopment platform, during the quarter we invested approximately $460,000 in 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 $200,000 in the 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 $450,000, and our incremental return on the invested capital was 7.5%. We ended the quarter with three properties under active redevelopment and other and various stages of feasibility planning for potential recapture from our net lease portfolio, and expect to continuously complete projects over the next few years. Turning to our asset management activities for the third quarter, we exited one lease property and sold two properties for an aggregate gross proceeds of $1.9 million. With that, I turn the call over to Brian for our financial results.
spk08: Thanks, Mark. Good morning, everyone. Last night, we reported a FFO per share of 57 cents. were reported in the prior year. FFO and net income for the third quarter were 53 cents and 31 cents per share, respectively. Total revenues were $50.5 million for the third quarter, representing a 20.3% increase over the prior year. Base rental income, which excludes tenant reimbursements and gap revenue adjustments, grew 10.5% to $40.9 million. This growth continues to be driven by our acquisition activity and recurring rent estimates leases, additional contribution from rent commencements, and completed redevelopment projects. On the expense side, G&A costs were $5.7 million in the quarter, as compared to $5 million in the third quarter of 2022. Change in G&A was primarily due to increased personnel costs, including non-cash stock-based compensation. Total property costs were $8.7 million for the quarter as compared to $5.7 million for the third quarter of 2022. This quarter included an increase in property operating expenses that was primarily due to the timing of reimbursable real estate tax payments, partially offset by lower rent expense, and also included an increase in lease Environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments, were $313,000 in the quarter as compared to $632,000 for the third quarter of 2022. Turning to the balance sheet and our capital markets activities, we ended the quarter with $750 million of total debt outstanding. This consisted of $675 million of senior unsecured notes with a weighted average interest rate of 3.9% and a weighted average maturity of 6.7 years, as well as $75 million drawn on our $300 million revolving credit facility. As of September 30th, net debt to EBITDA was five times, and 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 at $48.4 million, net debt to EBITDA would be approximately 4.7 times. Subsequent to quarter end, as Chris mentioned, we closed on a new $150 million senior unsecured term loan. The term loan matures in October 2025 with a 12-month extension option. 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, and an additional $75 million that can be funded at our option any time over the next six months. In connection with the closing of the term loan, we entered into interest rate swaps to fix SOFR for the full principal amount. Including the impact of these swaps, the effective interest rate on the term loan is 6.13% based on our leverage ratio as of September 30th. There's 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 possible public bond issuance. While the shorter term prevented us from taking greater advantage of the inverted yield curve upon fixing the rate, we were 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 2.2 million shares of common stock, are subject to outstanding forward sale agreements, which generated $71.6 million in net proceeds. We currently have approximately 1.5 million shares of common stock still subject to 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 new term home. Pro forma for these investments in capital activity, we expect our balance sheets to remain well positioned to support the company's growth. Leverage is expected to remain in line with our target range of 4.5 times to 5.5 times net debt to EBITDA, and we expect to maintain ample capacity under our revolving credit facility. 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 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 $438,000 since the end of 2022. Our net environmental remediation spending 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're raising our 2023 AFFO per share guidance to a range of $2.24 to $2.25 from our previous range of $2.23 to $2.25. 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 and deal pursuit costs, as well as $300,000 of anticipated demolition costs for redevelopment projects that run through property costs on our P&L.
spk06: With that, I'll ask the operator to open the call for questions.
spk01: Thank you. We will now 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 participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question comes from Todd Thomas from KeyBank. Todd, please proceed.
spk00: Hi, good morning. This is for Todd Thomas. I was just wondering if you could disclose what the blended cash investment yield was on the 3Q investments, and could you break out the yield on the acquisitions versus the development funding? Thank you.
spk07: Yeah. In the remarks, 7.2% was the initial cash yield in the third quarter, and they roughly were the same return between acquisition and development funding.
spk00: Okay. And do you see yields trending higher given the rise in borrowing costs? How should we think about the yields given that you already have a committed pipeline in place?
spk07: Yeah, again, with the $95 million that's 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 at rates that are significantly higher than those levels.
spk08: And the one nuance I would just add to Chris's comments is Development funding transactions by design are nine, 15 month type transactions. So some of the dollars that are going out in development funding are still at yields from transactions that were cut 12, 18 months ago. versus the sale-leasebacks or the more traditional acquisition activity, obviously shorter timeframe and a little bit more 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, you know, based on transactions that were cut a while back versus others will reflect the current environment.
spk00: Okay. And where are you still seeing the best opportunities in pricing? Has convenience store competition alleviated, or what about automotive and car wash?
spk09: Yes, it's Mark. So we're very active in all our asset classes. We're getting a lot of momentum across all the categories. Certainly some of the asset classes tend to be a little stickier on pricing as markets cycle through, but we remain competitive and a tremendous amount of opportunity, certainly in the convenience store, car wash, automotive parts, and I would say that the most competitive probably now is the quick service restaurant category as far as, you know, pressure on pricing.
spk06: Great. Thank you.
spk01: Thank you. Our next question comes from Wes Galladay from Baird. Wes, please proceed.
spk04: 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 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?
spk09: Excuse me, it's Mark. So we certainly haven't deviated from our underwriting model in our total valuation model. look at each deal and each portfolio. Yeah, so, you know, we haven't seen much of a deterioration in tenant rent coverage on the underwriting of new opportunities. So, you know, I think the answer is, yeah, the performance of the tenants, at least that we're underwriting, is in lockstep with the move in the market generally.
spk08: The other factor was on proceeds that tenants received. Right, so if you think of a typical sale leaseback transaction, where we're going to set rent at a rent coverage ratio and then apply some cap rate to that to determine proceeds to the tenant, the math would lead to either higher risk, which is what you're alluding to, but given our underwriting and the consistency there, as Mark mentioned, the net result would be less proceeds to the tenant, which is reflective of Chris's opening comments about folks in the space just having to come to the realization that the real estate isn't worth as much today as it may have been 18, 30 months ago.
spk04: Okay, yeah, thanks for clarifying that. I appreciate that, Brian. I guess then with capital becoming a little bit more scarce and maybe looking at alternative forms of equity for you, you do have 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?
spk07: Yeah, we certainly look at the portfolio and are aware of where we think there is maybe outsized value. And we do dispose of properties and we have disposed of small portfolios over the past couple of years. Certainly something we're aware of. We'll look and look around. But right now, I think the balance sheet's in great shape. The term loan certainly helps with that. We still have roughly $50 million of unsold forward equity. So we're We're looking at all the various forms of capital, Wes, and again, we'll transact where we think it makes sense.
spk06: Great. Thanks for the time, everyone.
spk01: Our next question comes from Mitch Germain from JMP Securities. Mitch, please proceed.
spk02: Hi, this is Jody from Mitch. One of the first questions I had is just understanding the composition of the pipeline. in terms of asset class and also if you're seeing any changes in the lease structure, maybe more term or escalators?
spk09: So we continue to balance out the pipeline, again, across all our asset classes. During the course of the year, there's always ebbs and flows as deals cycle through. Our goal is to be fairly well distributed. across all asset classes, geography, tenant mix, be mindful of the tenant concentration and geographic concentrations. With regard to terms, yes, we've been able to not only push pricing and return, but also inch up or put some pressure on annual escalators where appropriate. The term, the actual lease terms are, you know, still roughly on that 15 to 20-year base term on the initial commitment. But, yeah, the market certainly is... Conversations certainly have yielded all deal points to create overall value for us.
spk02: Fair, yeah. So, I mean, C-stores have been declining composition overall. But in terms of asset pricing there... Are you seeing similar price declines for those as compared to other assets in your pipeline? How's that faring?
spk07: Yeah, I think there are two thoughts on that question. So first off, if you look at our portfolio, one of our objectives is to diversify across convenience and automotive, retail, real estate. So with a background of our business being primarily C-Store, it's natural in our eyes that you'd see But we're still very comfortable with the C-store sector. Acquired nine great assets this quarter. There's certainly some C-store assets in our pipeline. But I think that's a natural evolution for Getty to be more balanced from a rent perspective. In terms of pricing within the various asset classes, again, I'm going to come back to the broader theme that was in my remarks, which is I think in retail real estate today, I think there is a an expectation that has to be understood by sellers that, you know, pricing has changed. Financing costs have dictated that, you know, in order to transact, red sellers have to kind of have an expectation that rates are going to be higher for longer, meaning that cap rates are going up, and therefore the value of their real estate is going down.
spk08: And I'll just add to that, which I think is implicit in what Chris is saying, and something we've talked about before, that the nature of the sale-leaseback business, which is our primary origination platform versus just aggregating assets from a variety of sellers, our counterpart, when we're sitting across the table from somebody, they're not just looking at a price to sell an asset and what return that generates for them or does not. These are finance professionals that are raising capital for their companies from store growth, for acquisitions, for technology initiatives, whatever it may be. So they're making, we're making real estate investments, but they're making financing decisions. And so they're looking at their financing alternatives. And sale and 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 in turn their cost of capital allows them to meet their hurdle rates, right, we can find opportunities to transact. But I think the main point you're hearing from all of us is that there's some transparency in our discussions, right, and given our relationships, our knowledge, where we're saying to these tenants, look, our costs are going up. We're open for business. We can transact. It has to meet our real estate underwriting expectations, and it has to meet our pricing expectations. And we've had some success, certainly over the last year, in being able to drive those conversations to transact.
spk02: Fair. So just on that point, are all the different asset classes in our pipeline seeing similar kind of price pressure, or is it different for different categories?
spk08: This is Brian. I think it's really driven by where we are in our life cycle with the different asset classes. So certainly car wash and C&G, where we are going direct to those tenants frequently and primarily. You see that the most. Our relationships, as we just entered that sector, say within the last 18 to 24 months. And QSR, 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 wash and CNG, and we're getting there at auto service. And in QSR, we're still sort of making our way through ramping up in that sector so that we can, again, drive that type of activity.
spk02: Thank you. And just the last one from me. You mentioned that the pipeline is fully funded, and part of that was a term loan. So do we have any expected timeline for the second tranche of the term then?
spk08: Yeah, it'll be within the next six months, right, because that's the term of that. And, you know, as always, we're looking to balance, you know, funding the transactions, maintaining our leverage profile, maintaining liquidity. So, you know, between that and the equity, we'll draw on each of those pools as it makes sense to maintain the balance sheet, and that'll occur over the next six months. Okay.
spk02: Thank you for the questions. That's all from me.
spk06: Operator, are there any more questions on the line?
spk01: Okay. It does look like we have one more. Aki Gunpupali from J.P. Morgan. Aki, please proceed.
spk03: Hi. Good morning. This is Akhil from J.P. Morgan. My first question is on how does the cost of a sale ease back compared with your operator's other financing alternatives right now?
spk07: I think your question was how does the pricing of a salee spec compare to the various other financing alternatives that our tenants have? What I'd say is that most of our tenants being private, 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 and tougher to transact, quite frankly. So I think what we're seeing is a lot more underwriting opportunities where 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. tenant and property all the way down to the property level. So I don't think it necessarily changes our view of what's attractive or not, but I'd say that Sally's back certainly looks more appealing to the tenants today than it did probably six, nine months ago.
spk03: Understood. Yeah. One last question. How much opportunity do you think is there in the car wash business as operators consolidate locations in that space?
spk07: Yeah, I think car wash 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, there is a lot of room for new store development as the express tunnel model takes share from traditional car washes. 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 the sector. I think we've done a pretty good job We're focused on not only providing capital to the sector, but really partnering with the right tenants long-term in the car wash space. And I do think you're going to see some consolidation there. And again, our view is that our tenants are going to do well in this environment and they'll probably continue to grow, whether that's through the store development or through M&A.
spk03: Great. Thank you for taking the questions.
spk01: This concludes our question and answer session. I would like to turn the floor back over to Chris Constant for closing comments.
spk07: Thank you, everyone, for joining us for our third quarter earnings call. We look forward to getting back out with everybody when we report our fourth quarter and full year results for 2023.
spk01: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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