Getty Realty Corp. (GTY) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Getty Realty Corporation Fourth Quarter 2012 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Joshua Dicker, Senior Vice President, General Counsel and Corporate Secretary. He will read the Safe Harbor statement. You may begin sir.

Thank you. I would like to thank you all for joining us for Getty Realty’s quarterly earnings conference call. Yesterday evening, the company released its financial results for the quarter ended December 31, 2012. The 8-K is 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 and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Examples of forward-looking statements would include management’s statements regarding financial guidance of calendar year 2013 for the nature of the company’s acquisition prospect. We caution you that such statements reflect our best judgments based on factors currently known to us and not actual events or results could differ materially. I refer you to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 as well as our quarterly and other filings with the SEC for a more detailed discussion of the risks and 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 update any forward-looking statements that may be made in the course of this call. With that, let me turn the call over to David Driscoll, our Chief Executive Officer.

Thank you, Josh and good morning everyone. Before I would get started with my formal remarks, I want to introduce the other officers of the company who are on the call today. And with me and Joshua Dicker, including Mr. Leo Liebowitz, our Co-Founder and Chairman; our Chief Financial Officer, Tom Stirnweis; and Kevin Shea, our Executive Vice President. We want to welcome you to our call for the fourth quarter and the year ended 2012, and reflecting on the events of the last year, I think it’s genuinely impossible to overstate how remarkable the year 2012 was for us. Considered during the year, we prevailed in a complicated legal proceeding in Bankruptcy Court. Managed our way through a complex set of economic and regulatory issues to preserve the underlying value in our portfolio, we refinanced our credit facilities in March of 2012 on market terms without additional advantage to our portfolio or our equity value in what proved to be the worst possible time a year ago at this time. We have by re-letting our properties improved our overall diversification and credit quality having entering into 10 new long-term triple net leases on more than 440 locations with 8 tenants including 3 New York Stock Exchange listed companies and three the other entities that leased existing portfolios from us and has proved to be good long-term partners. We paid or declared dividends in 2012 as giving $0.375 per share. We purchased a 10-year $50 million aggregate environmental insurance policy protecting against currently unknown environmental liabilities. We sold 54 properties in 2012 for $15.5 million and thus far in 2013 we sold an additional 36 properties in including the one terminal of $16.2 million in aggregate value. And those are just some of the highlights that we have looked at…

Thank you. (Operator Instructions) And we will take our first question from Yasmine Kamaruddin with JPMorgan.

Hi.

Yes.

Just a question on your 2013 guidance, on some of the key line items that we are seeing right here, for G&A for example, what would you say is your run rate for 2013 and ongoing from there?

At this point, what we have provided is AFFO and FFO guidance, and we are not prepared to go into specific line item numbers right now.

Okay, alright. So, we can assume that the fourth quarter G&A number would be carried forward?

Well, as I said in the remarks, the fourth quarter G&A number had a number of unusual, but we consider to be may be not unusual, but items that we don’t think will carry forward. So, again, I know it’s difficult to work from the bottom up, but that’s what we have provided at this point.

Okay, alright, got it. And as for your interest expense with the refinancing, you guys are paying 6% now on the $100 million term loan. So, I expect interest expense to probably increase for 2013?

I think that certainly they seem to be the guidance we have provided you is a modest increase in our overall interest expense for the year going forward. I think there is – there are some offsetting elements to that, because the property dispositions that basically reduced our overall borrowing as we get the present time. But overall, you have correctly identified the overall interest expense to go up, because it’s no longer fall floating rate.

Yeah. And plus you expect this term loan to be outstanding throughout its life right?

Yeah the Prudential term loan, yes, is outstanding its entirely growing up, yeah, 8 years.

Okay, alright, great. And for the fourth quarter and also full year 2012, what was the actual cash environmental expense?

We are going to provide that number in our 10-K upcoming. I think it’s approximately $5 million.

Okay. And that is for the fourth quarter only?

That was for the year 2012.

Okay. And what do you expect this to be in 2012? I know this number jumps around a lot, but yeah?

We expect it to be more than $5 million in 2012 and I think we have used words like significantly more.

Okay. And for your AFFO guidance, just looking at the calculations going from FFO to AFFO, I noticed that environmental cost aren’t included as they aren’t subtracted from the FFO. So, is this the same in 2013?

Well, environmental costs are above the line or below the line, however, you want to say it, but they don’t affect either AFFO or FFO. There is no difference essentially with environmental between the two lines. The main difference between FFO and AFFO is straight line rent.

Okay. And that’s it.

Yeah.

Alright.

Well, there is some other minor stuff, but virtually all of it is accounted for by straight line rent.

Okay. And can you talk a little bit on progress for the rest of the properties, I know you said on the call that you have 170 properties left that are operating and with tanks in the ground, then when I calculated just based on your press release on the 5th of December, you should have about 250 properties left to address, is that correct?

Well, I think we separate in our own mind tanked properties and untanked properties, the 250 probably includes both tanked and untanked.

Okay, alright. And so 250, if I do a 250 minus 170, then you would have 80 properties left, are you planning to sell those properties?

Those properties are being aggressively marketing and we are averaging at this point 3 to 5 closings per week in terms of the sales of those properties.

Yes, 3 to 5 closings per week. And what do you expect to get on a cash basis for these dispositions?

Well, that varies depending on the property and it’s a pretty wide variance there is really no specific guidance that you can draw out of that.

Okay. And also for the remaining 170 properties that you mentioned on your call, what are you assuming in terms of the rent rate, is it a pickup or generally a roll down?

Right now, those properties are contributing to us on a cash basis and on AFFO and FFO basis. However, we expect that we will reposition those properties that the net effect will be increased in their contribution to us. Whether that effect is through re-letting the property after putting some CapEx into it and getting more rent or that effect is in the form of selling the property and reinvesting the proceeds and getting rent from it. But we think overall net, net the result of that reposition is an improvement to our bottom line.

Okay, alright. So, generally you would expect to charge higher rent on the new leases to be signed for the 170 properties?

That’s not precisely what I said, I don’t want to get into back and forth with you. What I said was that we would expect to be reinvesting in those properties, repositioning them and we expect after we do that we would be able to get more rent. However, that if we sold property and then reinvestment proceeds that the net result would be we would be receiving more rent from the new properties purchased with the reinvested proceeds than we are currently collecting net of expenses on the property that we had sold.

Okay and for the 170 properties are you expecting to do more large like leases or are they more one-off things?

It will be more one off.

Okay.

I should add that I am aware of a one set of nine of them that we are in the process of finalizing the lease on. So…

Okay.

But you are not going to see 65 go in a lease.

Okay, got it. And you also said on the call that you may want to start acquiring, can you give us some guidance what you expect for 2013?

Other than we are actively looking for acquisitions, we have built in acquisitions portfolio and we are continuing to pursue it, that’s about as far as we are going to go.

Okay and these acquisitions are built into your guidance?

Our guidance does not have any acquisitions in it.

Okay and got it. Alright, great, thank you.

(Operator Instructions) We’ll go next to Jeff Lau with Sidoti.

Hi good morning. I just had a quick general question I know it’s been sometime, but regarding the Sandy, do we assume that the impact on the properties was not an issue or how do we look at that. I don’t know if you guys discussed that previously?

Well first good morning Jeff.

Good morning.

And yes, certainly on the last call it was an issue for us. But we were in the weeks following Sandy in fact I think we have had power on in this office for less than a couple of days at that point. And there were some individual impacts that resulted from Sandy. The one specific property that I think was the most damaged I believe is now back up and running. And so – and certainly from a perspective of 1000 locations the effect on the properties was minimal. There were also it was some damage that occurred in some of terminal property that we are dealing with. But again in the context of our overall operations I would not call what happened material.

Okay, alright. Thanks.

We’ll go next to Brett Reiss with Janney Montgomery Scott.

Good morning, David. How are you?

Just fine, Brett, how are you today?

Good, good. If on the acquisitions front, if a good deal did come your way based on the present capital structure, how big a deal could you do, if something came along at the right price?

More than $100 million, we have more than $100 million right now with of capital available to us Brett with an accordion that takes it up $50 million over that.

Okay. And in terms of the cap rates that deals are being offered, are there things around that you think you might be interested in or is the market too richly priced for the time being you will probably back away?

Well, we are finding things that we think makes sense in light of our capital cost and capital structure. And I am not going to suggest that it’s absolutely certain and we are going to get transactions done, but we are certainly seeing things in the pipeline and in the portfolio that are intriguing to us.

Okay. Different question, there have been some newspaper accounts talking about certain entities building infrastructure to facilitate the battery-operated cars. Is something like that an intermediate or long-term threat to what we do, how do you view all of that?

Well, I don’t see how something like that is a threat to us or our tenants who lease properties from us. It’s the predominant mode of providing energy to individual transportation vehicles was batteries versus gasoline. And we were in the context of a battery change out system. There would still need to be in place that batteries would get changed out and why you were getting your batteries changed out, you would still go and get a coup of coffee, buy a lottery ticket, a newspaper and maybe some soda.

Right, right. I appreciate you answering my questions and congratulations you did – you had a lot on your plate in 2012 and I see a lot of progress.

Thank you.

And we’ll go next to Matthew Feldman with Davidson Kempner.

Hi, good morning. How much cash is the company sitting on currently and our dividends, I guess the $0.20 being paid from that cash, from the refinanced proceeds, or some other proceeds

So, how much cash that we have right now. It’s a very difficult question to ask because we have a revolver with the bank and we essentially try to run our cash balances as low as possible to payoff the revolver to minimize our interest cost. But the underlying question you are asking is are repaying a $0.20 dividend by essentially out of our cash reserves or borrowing money. And the answer to that is we don’t think that. Our view today we calculated it that we obtained our dividend out of cash that we’ve generated from our operation.

Okay, thank you.

We’ll go next to Nick Zamparelli with Zeke LP.

Hi, guys. Thanks for taking the questions. Just a quick one on historical numbers here what were the annual run rate net revenues on the non-master lease properties and how many of these properties are there?

Roughly, 350 properties in the annual run-rate on the margin of $40 million to $50 million range.

$40 million to $50 million and are there any annual escalators in those terms, in those contracts.

Yeah. Well, there are escalators in all of our leases. I would be hard pressed to answer a literal question of whether they are annual escalators.

Okay, okay. And then I just want to make sure I have the numbers right on the asset sale, so you said 54 in 2011, 36 in 2012, that’s a total of 90. How many are left for sale that you are pursuing aggressively, was that, did I hear 80 was the number?

The way again in the de-tanked properties, there are approximately 40 to 50 left for sale, but that’s – we are not what we don’t provide of course is how many of those are already being contract to sell. And a goodly portion of those are already under contract to sell. There are 170 properties, which are tanks in the ground that are operating, but we are very far down the road in terms of our assessment in executing on some of those going for sale and some of those being re-let.

Okay. So, 170 have tanks in the ground that are currently generating revenue, but not sure how many of those are going to be sold versus maintained?

That’s correct. So, I believe that it’s 70 to 100 of those I believe at the end of the day likely will be sold.

Okay, of the operating?

Yeah.

Okay. And then how do we in terms of those 107 you kind of just how should we think about the current run rate revenue on those 170 properties assuming that they still stay the way they are today?

Well, I think we don’t really think about it in terms of revenues. We think about it in terms of contribution rate. And I would say that they make a modest contribution to our bottom line sort of revenues net of operating expense.

Okay. So now you’re not giving a revenue number on those 170 properties?

No we’re not.

Okay. CapEx expectations for 2013 are you giving the number there?

No, we are not providing specific guidance on that. Certainly there are some CapEx things that are going to go into the portfolio over the next three to five years. And I think that what we talked about is across the properties that we have, find new leases on. We are looking at something in the order of the mid-30 kind of CapEx number with the tenants providing essentially $3 for every $1 we are providing over the next three to seven years.

Okay, okay, great. Thanks very much.

(Operator Instructions) We will go next to Andrew Jones with North Star Partners.

Hi good morning. I was curious going back to the conference call you guys had back last May. You talked about the properties, the marketing properties and broke them down into buckets and the 282 that you announced the lease on, you described them as average to above average. And then the next bucket was 254 stations that were above average assets, is it safe to assume that all of these leases that have been announced since then have come out of the above average bucket?

Yeah.

Okay and then could you please again say what the stations that you have left to sell are the number I thought I heard a different number than you said 40 or 50 I believe in your last response?

I think it can get confusing, so let me try to restate it. So, of the properties that do not have tanks in the ground there are over 40 and 50 left to sell. But as I remarked a significant portion of those are under contract to sell.

So, how many total – are there that don’t have tanks in the ground?

How many now at this moment?

Yeah, sure.

I think that number is on the order of 40 plus or minus.

Okay. And then I think in the September balance sheet you guys carried, you had 132 properties for sale at a net carrying value of about $23 million-$24 million, can you tell us what the current number in carrying value is at year end?

We have 111 properties that were classified as held for sale as of the end of the year with the net book value of $25 million. That number has increased even though we sold properties because additional properties specifically the terminals have been added to the list during the last 90 days.

Okay. I think my other questions were answered. Just there was a one question about the non-marketing properties. I think the last time you guys broke those out was at the end of 2011, since that time the profitability of that group of properties increased?

The profitability of those groups of – the leases of those properties have escalators in them. So, there has been the normal escalation process that’s going on in that period of time. For us as the overall profitability of those stores is being collected by the tenants back to question.

No, I guess a better way to ask the question is do you think the value of those things is higher now, have the values grown? I mean, it seems like with low interest rate environment that the values of a lot of real estate have grown. I think the K said that you guys have acquired 395 properties since 2003 for $518 million. And I am just trying to think about whether or not those properties are worth more or less than the $518 million you paid for them?

Well, we would for all the reasons you just stated we believe that there was at least what we paid for them. How does that sound?

Well, just I would hope they would be worth more, that would be better but I’ll take it.

I understand, but I think in aggregate, I think you are probably right, but I don’t want to get out there touting that our properties have gone up. And I mean it just doesn’t seem like a good place to go from it.

Well, I don’t think anybody will accuse you guys of being touts, that’s for sure. That’s all I have. Thank you.

We’ll take our last question from Josh Bederman with Pyrrho Capital.

Hi guys. You mentioned that you were looking at acquisitions obviously I understand it’s not in your guidance. Can you give us some color on the kind of cap rates you are seeing on the stuff that is in the pipeline or at least that’s being shown to you?

Well, I think this is why you think that they are in the marketplace today. The properties that we like that we are looking at I think go in the sort of 7% to 8% kind of range. That’s where I think you can buy quality locations without taking a lot of risk in terms of value and have decent tenants in them. I think we could sort of think we are going to be which we could better than that, but we would be very unlikely to consider something that has a lower cap rate than that.

Okay, thanks. And then you said that you have 100, possibly 150 of capital mostly from your line, how comfortable, where would you guys be comfortable in terms of the leverage ratio in running the company?

We have always wanted to run the company at a conservative ratio. I think guidance, our theory on that is probably property not more than 40% to 50% of value.

Okay.

You probably assume that as we started to grow or push to those kinds of limits that it’s more likely to become sort of an equity transaction, I am not saying common equity, but.…

Great.

(indiscernible) some sort of a subordinated transaction could occur.

Right. But right now, you actually have capacity that could just basically use your lines and growth in next 100, 150 and then you will start bumping up against there, is that correct?

No, even then I think we have got some capacity over and above that, but right now the capacity we have under the existing line is 100 to 150, and there might even be a little bit. We are still sort of below the numbers I gave you at that point.

Yeah, that’s okay. Alright, thank you.

That concludes today’s question-and-answer session. Mr. Driscoll, at this time I will turn the conference back to you for any additional or closing remarks.

I don’t have a lot of additional or closing remarks. I want to thank everybody for their continued interest in Getty and we look forward to talking to you during the quarter and next quarter as well.

This concludes today’s conference. Thank you for your participation.