Getty Realty Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 8 speakers on the call.

Operator

Morning, and welcome to Getty Realty's Earnings Conference Call for the Q3 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.

Operator

Dicker.

Speaker 1

Thank you, operator. I would like to thank you all for joining us for Getty Realty's 3rd quarter earnings Conference Call. Yesterday afternoon, the company released its financial and operating results for the quarter ended September 30, 2023. Form 8 ks and earnings release are available in the Investor Relations section of our website atgettyrealty.com. Certain statements made in the course of this call are not based on historical information and may constitute forward looking statements.

Speaker 1

These statements are based on management's current expectations and beliefs and are subject to trends, events and uncertainties 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 by referring to the company's annual report on Form 10 ks 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 reflects 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 GAAP financial measures, including our definition of adjusted funds from operations or AFFO and our reconciliation of those measures to net earnings.

Speaker 1

With that, let me turn the call over to Christopher Constance, our Chief Executive Officer.

Speaker 2

Thank you, Josh. Good morning, everyone, and welcome to our earnings call for the Q3 of 2023. Joining us on the call today are Mark O'Leary, 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.

Speaker 2

In the Q3, we produced strong AFFO per share growth of 5.6% and for the 9 months ended September 30, 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 $269,000,000 including $155,000,000 in the 3rd quarter. We also continue to maintain an attractive investment pipeline With more than $95,000,000 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 6 to 9 months. When combined with our investments to date, our pipeline SaaS of our investment platform and steady growth in our cash flow and earnings can be attributed in part to our successful capital markets activity.

Speaker 2

Since January of 2022, we have raised more than $600,000,000 of attractively priced capital, Much of it with a forward or delayed draw execution, including our recently announced $150,000,000 unsecured term loan, $225,000,000 of long term unsecured notes and more than $230,000,000 of common equity. Our strategic approach to raising capital has Enhance our ability to lock in accretive 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 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 to bring new properties into the company's portfolio with tenants that are well known to us and who have a proven record 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.

Speaker 2

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 our prices that reflect the rapid rise in financing costs. As we look beyond our pipeline of deal activity, The real estate market has changed significantly since the end of the second quarter. Rapid changes in the availability and cost of capital have outpaced Sellers' expectations for the value of their properties. For Getty specifically, we believe prospective tenants who are often making long term financing decisions Related to M and 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.

Speaker 2

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 $0.45 per share. This represents the 10th straight year we have grown the dividend alongside our earnings growth. Our Board believes this annual increase is appropriate as Maintains 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 capital activities, we are raising our 2023 AFFO guidance by a penny $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.

Speaker 2

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 Partnering with growing regional and national operators, we'll 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.

Speaker 3

Thank you, Chris. As of the end of the quarter, our lease portfolio included 10 74 net leased properties and 3 active redevelopment sites. Excluding the active redevelopments, occupancy was 99.7% and our weighted average lease term was 9 years. Our portfolio spans 40 states plus Washington, D. C.

Speaker 3

With 61% of our annualized base rent coming from top 50 MSAs, 79 percent 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 155,000,000 Net of amounts previously funded across 50 properties in a number of different property types and attractive MSAs. Highlights of this quarter's investments include the acquisition of 9 convenience stores located in Las Vegas and various markets Across Texas and the Southeast were $55,100,000 9 Car Wash properties, which are located through the U.

Speaker 3

S. Were $48,500,000 2 drive thru quick service restaurants and an auto service center for a total of $3,500,000 And 9 under construction Car Wash properties for $31,500,000 As part of this acquisition, we provide Additional funding during the construction period to complete these projects. We also advanced incremental development funding in the amount of $16,600,000 including accrued interest for the construction of 20 new to industry car washes, convenience 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 7.2% and the weighted average lease term for acquired properties was 17.2 years. Subsequent to quarter end, we invested an additional $3,300,000 towards the development of an Express Tunnel Car Wash property.

Speaker 3

Cumulative

Speaker 2

result of our year

Speaker 3

to date investment activity is $269,000,000 deployed at initial cash yield of approximately 7.2% across all of our targeted asset types. Looking ahead regarding $95,000,000 of commitments to fund acquisitions and developments, we expect to fund these transactions for the next 6 to 9 months At an average initial yield, 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 And where we transacted in 2021 2022. The amount of cap rate expansion combined with the The 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.

Speaker 3

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 accretive investments as we move through the remainder of 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 is leased 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, It 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 3 properties under active redevelopment and other in various stages of Feasibility planning for potential recapture from our net lease portfolio and expect to continuously complete projects over the next few years.

Speaker 3

Turning to our asset management activities for the Q3, we exited 1 leased property and sold 2 properties for aggregate gross proceeds of With that, I turn the call over to Brian for our financial results.

Speaker 4

Thanks, Mark. Good morning, everyone. Last night, we reported AFFO per share of $0.57 for Q3 2023, representing a 5.6% increase $0.54 per share were reported in the prior year. FFO and net income for the Q3 were $0.53 $0.31 per share, respectively. Total revenues were $50,500,000 for the 3rd quarter, representing a 20.3% increase over the prior year.

Speaker 4

Base rental income, which excludes tenant reimbursements and GAAP revenue adjustments, grew 10.5% to $40,900,000 This growth continues to be driven by our acquisition activity and recurring rent escalates, leases, additional contribution from rent commencements and completed redevelopment projects. On the expense side, G and A costs were $5,700,000 in the quarter as compared to $5,000,000 Total property costs were $8,700,000 for the quarter as compared to $5,700,000 for the Q3 of 2022. This quarter included It also included an increase in leasing and development expenses due to additional professional fees and demolition costs for the development projects. 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 Q3 of 2022. Turning to the balance sheet and our capital markets activities.

Speaker 4

We ended the quarter with $750,000,000 of total debt outstanding. This consisted of $675,000,000 of senior unsecured notes with a weighted average interest of 3.9 percent and weighted average maturity of 6.7 years as well as $75,000,000 drawn on our $300,000,000 revolving credit facility. As of September 30, net debt to EBITDA was 5 times and total debt to total capitalization was 35%, Subsequent to quarter end, as Chris mentioned, we closed on a new $150,000,000 senior unsecured term loan. Term loan matures in October 2025 with The term loan includes an initial draw of $75,000,000 that was funded at close and used to repay amounts outstanding under our revolving credit facility And an additional $75,000,000 that can be funded at our option anytime over the next 6 months. In connection with the closing of the term loan, we Interest rate swaps to VIXSOFR for the full principal amount.

Speaker 4

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 30. So a little bit more color on the term loan. We're 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 2 to 3 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 are still able to lock in material relative to the returns on our invested capital, while keeping our investment pipeline funded and retaining the flexibility I mentioned.

Speaker 4

Moving to our Equity Capital Markets activities. During the quarter, we settled 2,200,000 shares of common stock, are subject to outstanding forward sale agreements, Generated $71,600,000 in net proceeds. We currently have approximately 1,500,000 shares of common stock still subject to Outstanding forward equity agreements, which upon settlement are anticipated to raise gross proceeds of approximately $48,400,000 Returning to the $95,000,000 committed investment pipeline. As Chris mentioned, these transactions are fully funded And we expect to maintain ample capacity under our revolving credit facility. As our investment pipeline evolves, we continue to evaluate all capital sources ensure that we're funding transactions in an accretive manner while also maintaining our investment grade credit profile.

Speaker 4

With respect to our environmental liability, we ended the quarter at $22,700,000 which was a reduction of $438,000 since the end of 2022. Our net environmental remediation spending in the 3rd quarter was approximately $1,600,000 Planning with respect to our 2023 earnings outlook As a result of our year to date investment activity and capital markets transactions, we are raising our 2023 AFFO per share guidance to a range of $2.24 to $2.25 from our previous range of $2.23 to 2.24

Speaker 3

As a

Speaker 4

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 field pursuit As well as $300,000 of anticipated demolition costs for redevelopment projects that run through property costs on our P and L. With that, I'll ask the operator to open the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Todd Thomas from KeyBanc. Todd, please proceed.

Speaker 5

Hi, good morning. This is Antara Nakajuri on 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.

Speaker 2

Yes. As we in the remarks, 7.2% was the initial cash yield in the 3rd quarter And then roughly we're the same return between acquisitions and development funding.

Speaker 5

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?

Speaker 2

Yes. Again, with the $95,000,000 that's committed, as we mentioned, we think that that's going to be about 20 basis Points over where we invested in the Q3. And then as Mark mentioned in his remarks, we are putting out new Letters of intent at rates are significantly higher than those levels.

Speaker 4

And the one nuance I would just add to Chris' comments is development funding transactions by design are 9, 15 month type transactions, so some of the dollars that are going out in development funding are still at yields from transactions that Cut 12, 18 months ago versus the sale leasebacks with a more traditional acquisition activity, obviously shorter timeframe, 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 based on transactions that were cut a while back versus others will reflect the current environment.

Speaker 5

Okay. And where are you still seeing the best opportunities in pricing? Has convenience store competition alleviated? Or what about automotive and

Speaker 3

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 convenience store, Car wash, automotive parts, I would say that the most competitive probably now is the quick service restaurant category as far as

Operator

Thank you. Our next question comes from Wes Golladay from Baird. Wes, please proceed.

Speaker 6

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? Are you seeing the operations of the tenants kind of grow in line with this more inflationary environment?

Speaker 3

It was excuse me, it's Mark. So we certainly haven't deviated from our underwriting model in our total valuation Look at each deal and each portfolio, yes, so we haven't seen much of a deterioration in tenant rent coverage The performance of the tenants at least that we're underwriting is a mock step with the move in the market generally.

Speaker 4

The other factor was on proceeds that tenants receive, right? So if you think of a typical sale leaseback transaction, Right. We're going to set rent at a rent coverage ratio and then apply some cap rates to that to determine proceeds to the tenant, Right. The math would lead to either higher risk, which is what Europe alluded 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' opening comments about folks in the space just having To come to the realization that the real estate isn't as worth as much today as it may have been 18 months, 30 months ago.

Speaker 6

Okay. Yes. Thanks for clarifying that. Appreciate that, Brian. I guess then with capital becoming a little bit more scarce and maybe looking at alternative forms 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.

Speaker 6

Do you have any increased appetite to start monetizing some of these lower cap rate assets?

Speaker 2

Yes. We certainly will look at the portfolio and are aware of where We think there is maybe outsized value. 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 is in great shape. The term loan certainly helps with that.

Speaker 2

We still have roughly $50,000,000 of on sell forward equity. So we're looking at all the various forms of capital, Wes, and again, we'll transact where it makes sense.

Speaker 6

Great. Thanks for the time, everyone.

Operator

Our next question comes from Mitch Germain from JMP Securities. Mitch, please proceed. Hi.

Speaker 7

This is Jody for 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?

Speaker 3

So we continue to balance out the pipeline again across all our asset classes. During the course of the year, it'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 concentration. With regard to terms, yes, we've been able to not only push pricing and return, But also inch up or put pressure on annual escalators were appropriate. The term the actual lease terms are still roughly 15 to 20 year base term on initial on the initial commitment.

Speaker 3

But, yes, the market certainly is conversation certainly had yielded Full deal points to create overall value for us.

Speaker 7

Fair. Yes. So I mean C stores have been declining composition But in terms of asset pricing there, are you seeing similar price declines for those as compared to other assets in your pipeline? How is that fairing?

Speaker 2

Yes. I think, well, just there are 2 thoughts in 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 The composition of our rent become more balanced across all the categories that we're investing in. So we're still very comfortable with the C store sector, Acquired 9 great assets this quarter.

Speaker 2

There are certainly C store assets in our pipeline. But so 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 An expectation that has to be understood by sellers that pricing has changed. Financing costs have dictated that in order to transact where sellers have to kind of have an Expectation of rates are going to be higher for longer, meaning that cap rates are coming are going up, excuse me, and therefore, the value of their real estate is going down.

Speaker 4

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 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, right? These are our finance professionals that are raising capital, Right. 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, Right.

Speaker 4

And so they're looking at their financing alternatives and sale leaseback financing is just one of those and we happen to be Particularly competitive in that area today. So as long as our cost of capital or 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, what we're saying to these tenants, look, our costs are going up.

Speaker 4

We're hoping for business we can transact, Has to meet our real estate underwriting expectations and it has to meet our pricing expectations. And we've had some success Certainly over the last year and being able to drive those conversations to transact.

Speaker 7

Fair. So just on that point, are all the different asset classes in our pipeline seeing similar kind of

Speaker 4

Asset classes, certainly Car Wash and CNG, but we are going direct to those tenants frequently And primarily, you see that the most, our service, which is ramping up our relationships as just entered that sector, say, within the last 18, 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 We're in Car Wash and C and G 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.

Speaker 7

Thank you. And just the last one from me. You mentioned that the Pipeline is fully funded and part of that was the term loan. So do we have any expected timeline for the 2nd tranche of the term loan?

Speaker 4

Yes. It will be within the next 6 months, right, because that's the term of that. And as always, we're looking to balance Funding the transactions, maintaining our leverage profile, maintaining liquidity. So between that and the equity, We'll draw on each of those pools as it makes sense to maintain the balance sheet and that will occur over the next 6 months. Operator, are there any more questions on the line?

Operator

Okay. It does look like we have one more, Aki Gunkupoli from JPMorgan. Aki, please proceed.

Speaker 4

Hi, good morning. This is Akhil from JPMorgan. My first question is on how does the cost Of a sale leaseback compared with your operators' other financing alternatives right now?

Speaker 2

I think your question was how does the pricing of Facilities Spec compare to the various other financing alternatives that our And it's have. And 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 For 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 here and a focus on real estate Tenants and property

Speaker 3

all the way down

Speaker 2

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 Sealy's back certainly looks more appealing to the tenants today than it did probably 6, 9 months ago.

Speaker 4

Understood. Yes. One last question. How much opportunity do you think is there in the car wash business As operators consolidate locations in that space?

Speaker 2

Yes, I think car wash was

Speaker 4

a sector that had a lot of

Speaker 2

capital flowing into it over the last several years. Obviously, the view of the tenants in that space is there is a lot of room for new store development as Express tunnel model takes share from traditional car washes. Again, our view in that space has been want to be with large established operators who have a track record of operating as well as growing in the sector. And I think we've done a pretty good job with that in terms of picking our relationships there. Again, 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.

Speaker 2

And I do think you're going to see Consolidation there. And again, our view is that our tenants are going to do well in this environment, and Thank you, everyone, for joining us for our Q3 earnings call. We look forward to getting back out with everybody when we report our 4th quarter and full year results for 2023.

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