GTY
#Thank you, operator.
I would like to thank you all for joining us for Getty Realty's fourth quarter and year-end earnings conference call.
This afternoon, the company released its financial results for the quarter and year ended December 31, 2017.
The Form 8-K 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 statement.
Examples of forward-looking statements include our 2018 guidance and may also include statements made by management in their remarks and in response to questions, including regarding future company operations, future 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 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, 2016, subsequent quarterly reports filed on Form 10-Q 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 statement 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.
Also, please refer to our earnings release for a discussion of our ---+ of discussion of our use of non-GAAP financial measures, including our definition of AFFO, which was revised at the end of the quarter and year, and our reconciliation of those measures to net earnings.
With that, let me turn the call over to <UNK> <UNK>, our Chief Executive Officer.
Thank you, Josh.
Good morning, everyone, and welcome to our call for the fourth quarter and year-end 2017.
With Josh and me on the call today are <UNK> <UNK>, our Chief Operating Officer; and <UNK> <UNK>, our Chief Financial Officer.
I'll begin today's call by providing an overview of our fourth quarter and year-end 2017 performance, touch on our 2018 strategic objectives and then I'll pass the call to <UNK> to discuss our portfolio in more detail, and then <UNK> will discuss our financial results.
Our results of business activities in the fourth quarter capped off what was a strong year all around for the company in 2017.
We are pleased that our portfolio of properties and roster of tenants grew significantly during the year.
And more importantly, we are encouraged that the fundamentals of the convenience and gasoline station sector remain among the healthiest in the entire retail landscape.
As we close out 2017 and look ahead to 2018, we remain focused on creating shareholder value by executing on each of our stated growth initiatives, including realizing organic growth from our operating assets, enhancing our portfolio through accretive acquisitions and unlocking embedded value through our selected redevelopments, all of which, we believe, we demonstrated throughout 2017.
Turning to our results for the quarter.
We again produced growth in net earnings, FFO and AFFO for the quarter as compared to the same period for the prior year.
On a per share basis, which takes into account our capital-raising activities during 2017, our quarterly AFFO per share was $0.43, which was $0.01 per share ahead of our performance for the prior year's quarter.
And for the year-end 2017, we reported AFFO per share of $1.66, which exceeded the high end of our revised 2017 guidance range of $1.64 per share.
The strength of our quarter and year stems from our success in executing our growth both in terms of acquisitions and redevelopment.
On the acquisitions front, we invested $214 million to acquire 103 properties during the year in a combination of portfolio and individual transactions.
With respect to redevelopment, rents commenced on 2 redevelopments during 2017, including a new-to-industry convenience and gas location, which we delivered in the fourth quarter.
In addition to our recently completed transactions, we have a pipeline of acquisition opportunities and a growing number of redevelopment projects, which are scheduled to come online in 2018 and beyond.
Utilizing the financial flexibility that we've worked hard to create, we were able to finance our growth in 2017 with a combination of debt and equity, including a long-term fixed rate, debt private placement and measured use of our ATM program.
We place a premium on being conservatively leveraged and are committed to maintaining a well-laddered and flexible capital structure as we look to grow the company.
Looking ahead, we remain focused on our three-pronged growth platform consisting of a combination of stable growth, supported by asset management activities and our core net lease portfolio, expanding our portfolio through acquisitions in the convenience, gas and auto-related sectors and selected redevelopment projects.
We are confident that we'll be able to continue successfully execute on our strategy throughout 2018.
We will remain diligent on our underwriting standards as we look forward.
As such, we will continue to be focused on acquiring high-quality real estate and partnering with tenants who share our commitment to the growth and evolution of the convenience and gas sector as these are critical components to driving additional shareholder value as we move through 2018 and beyond.
With that, I will turn the call over to <UNK> <UNK> to discuss our portfolio and investment activities.
Thank you, Chris.
In terms of our investment activities, we had a very productive year as we added high-quality assets to the portfolio, both including those with gas and convenience uses as well as properties with potential for alternative use.
Substantially, all the properties acquired have full-service C-stores and competitive gas operation, and many have either in-line or stand-alone QSR offerings, which adds to site's earnings potential.
During 2017, Getty's pipeline of potential transactions increase significantly.
For the year, we underwrote more than $1.3 billion opportunities, which meet our initial screening process.
The result of which was the acquisition of 103 properties for the year ended 2017.
Our total acquisition volume was approximately $214 million.
Our weighted average return exceeded 7.3%, and the weighted average initial lease term was 14.4 years.
To review a few highlights of our investment activities, for the year, we added 6 new high-quality tenants to the portfolio, including Applegreen, Circle K, Empire Petroleum and Jiffy Lube, among others, further advancing our goal of diversifying our rental income by the addition of tenants with strong operations and financial quality.
We also added several new geographic areas to our portfolio, chiefly, our expansion into both the southeastern and southwestern United States.
We are now represented in 28 states.
Moreover, post our 2017 investment activity, we now have 62% of our rental income coming from the top 25 national MSAs.
While the acquisition market continues to be competitive in the convenience and gas sector, we remain disciplined in our underwriting criteria.
Our pipeline of actionable opportunities remain strong, and we are in the process of reviewing and pursuing several additional acquisition opportunities for both single assets and portfolios.
Moving to our redevelopment platform.
We delivered our third redevelopment project during the quarter.
In December, rent commenced for a new-to-industry convenience and gas location, leased to [Sheik], in Central Pennsylvania.
Our total investment in the project was $392,000 and we will generate a return on this investment of more than 20% on an incremental basis.
In terms of redevelopment projects, we ended the quarter with 13 signed leases and LOIs, which includes 9 active projects and 4 additional projects and properties which are currently included in our net lease portfolio.
All these projects are continuing to advance through the redevelopment process.
We expect substantially all these projects will be complete over the next 1 to 3 years.
In total, we've invested approximately $1.1 million in the 13 redevelopment projects in our pipeline, and we expect to have rent commencements at several sites during 2018.
On the capital spending side, we estimate that these 13 projects will require total investment by Getty of $10.5 million and will generate incremental returns to the company in excess of where we can invest these funds in the acquisition market today.
For more detailed information of the redevelopment pipeline, please refer to Page 14 of our investor presentation, which can be found on our website.
We remain committed to transforming selected sites in our portfolio and look forward to updating everyone as we make progress.
As a result of all of our activity, we ended the year with 890 net lease properties, 9 active redevelopment sites and 8 vacant properties.
Our weighted average lease term is approximately 11 years, and our overall occupancy, excluding our 9 active redevelopments, remain constant at 99.1%.
With that, I turn the call over to <UNK>.
Thank you, <UNK>.
For the fourth quarter, our total revenues and revenues from rental properties, which excludes tenant reimbursements and interest on those with mortgages receivable, were $34 million and $28.2 million, respectively, representing increases of 14.4% and 13.7% over the prior year's quarter, respectively.
The growth was driven primarily by the benefit from our Empire and Applegreen transactions.
During the fourth quarter of 2017, our cash operating expenses, consisting of property cost and G&A expenses, increased by $0.3 million quarter-over-quarter.
In addition, our environmental expense increased by $2.1 million in the quarter.
For more information on specific expense movements, please refer to this afternoon's earnings release.
Our FFO for the quarter was $20.2 million or $0.51 per share as compared to $17.9 million or $0.52 per share for the prior year's quarter.
Our AFFO for the quarter was $17.3 million or $0.43 per share as compared to $14.5 million or $0.42 per share for the prior year's quarter.
It should be noted that beginning in the fourth quarter of 2017, the company revised its definition of AFFO to exclude 3 additional items: environmental litigation accrual, insurance reimbursement, and legal settlements and judgments, because the company believes that these items are not indicative of its core operating performance.
As a result, the company will no longer highlight notable items when discussing comparability of its AFFO from period to period.
For the year ended 2017, our total revenues and revenues from rental properties were $120.2 million and $101.3 million, respectively, representing increases of 4.2% and 4.8% over the prior year's result.
Again, this growth stems from our 2017 acquisition activities, and we expect the full year impact of this growth to be felt in 2018.
For the year ended 2017, our cash operating expenses decreased by $1.1 million.
Our FFO for the year was $74.6 million or $2 per share as compared to $64.2 million or $1.87 per share for the prior year.
Our AFFO for the year was $62 million or $1.66 per share as compared to $57.1 million or $1.67 per share for the prior year.
Turning to the balance sheet and our capital markets activities.
We ended the quarter with $380 million of borrowings, which includes $155 million under our credit agreement and $225 million of long-term fixed-rate debt.
Our balance sheet is strong and well positioned.
Our weighted average borrowing cost is 4.8%, and the weighted average maturity of our debt is 3.3 years, with approximately 60% of our debt being fixed rate.
Our debt to total capitalization currently stands at approximately 28%, and our net debt to EBITDA is 3.8x.
In addition, we've judiciously utilized our ATM program during the quarter and issued $5 million of capital at an average price of $28.70 per share.
For the year, we raised $117.8 million of capital, $104.3 million through our follow-on offering at $23.15 per share and $13.5 million through our ATM program at an average price of $27.28 per share.
Our environmental liability ended the quarter at $63.6 million, down $11 million for the year.
For the quarter and year ended December 31, 2017, the company's net environmental mediation spending was approximately $3.3 million and $12.9 million, respectively.
Finally, we are introducing our 2018 AFFO per share guidance at a range of $1.68 to $1.74 per share.
Our guidance does not assume any acquisition or capital market activities, although it does reflect our expectation that we will continue to execute on our redevelopment, leasing and disposition activities.
Specific factors which impact our guidance this year include: one, the full year impact of earnings from the Empire and Applegreen transactions; two, our expectation that we will forego rent when we recapture properties for redevelopment; three, our expectation that our cost of borrowings will increase in 2018; and four, the full year impact of the dilution associated with the company's 2017 capital-raising activities.
With that, I will turn the call back over to Chris.
Thank you.
That concludes our prepared remarks, so let me ask the operator to open the call for questions.
Yes, that's a great question.
We're certainly mindful of our maturity schedule and the percentage of debt that's flowing versus fixed.
The floating percentage is elevated this quarter because the closing of Applegreen inside of the quarter.
I think as we look forward, we're simply evaluating additional balance sheet transactions to reduce our exposure to rates and also extend our debt maturities to more closely align with where our leases are maturing.
It's not contemplated in the guidance.
I'd say, right now, we're evaluating a few different alternatives for more long-term capital.
So I think that's about all we'll get into at this point on the call.
Yes, sure.
We certainly believe, sitting here today, we have access to capital that we need to achieve our growth plans both in terms of raising additional debt and/or equity and then potentially utilizing our ATM program further.
On the debt side, we maintain that there's sub-4x debt-to-EBITDA level on a pro forma basis for Applegreen and Empire at year-end.
We said publicly that we can operate at a higher leverage level of that 4.5 to 5.5x.
With that said, Getty's always been conservative from a leverage standpoint, and I don't think that we would plan to deviate from that philosophy.
On the ATM side, we plan to continue to use the program where we have opportunities to issue at prices which we find attractive and where there are immediate uses for that capital in terms of growth, either from the acquisitions pipeline or from a redevelopment portfolio.
And we do believe that, as we look ahead into 2018, that we can execute that into some of our projects upon their completing during the year.
Yes.
It's really hard to say that there is a particular number, that 15%, or plus or minus, in various other years.
Our portfolio acquisitions generally stem from industry M&A, where we're partnering with an operator who's acquiring an operating business.
So the level of transactions that we have historically reviewed has moved from year-to-year.
And obviously, transactions are competitive and have historically been competitive, so the rate of actually closing on industry M&A has been kind of higher in certain years and quite frankly lower in others, just given the lumpiness of the M&A in the industry.
The one thing I would add to the comment, though, it's just a little ---+ apart from your question is I do think that, as a company, our growth in the industry is being recognized and that we are seeing more opportunities.
We continue to be very selective and have a focus on certain markets and acquiring certain types of real estate.
So nothing's changed from an underwriting perspective, but I do think we are seeing more activity, which we're excited about.
Considering out of the markets, right, I mean, some of it is a cost of capital gain.
I think that the MLP market has kind of come back a little bit and their cost of capital is maybe less competitive than others.
There's certainly private equity and private real estate funds that are very active in the sector that are ---+ that we see quite often.
And we continue to see other REITs, public and private REITs, that like the sector and are often looking at some of more assets.
They're the ones that we're trying to acquire.
Yes, let's start with that piece of the question first, Tony.
That figure of $1.3 billion that <UNK> quoted includes everything from single-tenant lease acquisitions, where we're looking at acquiring an existing triple net lease for assets that met our initial real estate screening.
So obviously, there's a number ---+ a ton of one-off net lease activity in the market, but it has to meet our initial screening in order to get to <UNK>'s team in terms of underwriting.
All the way up to some of the larger M&A deals in the sector, where we looked at.
The Empire deal was north of $100 million, so that certainly qualifies as a larger portfolio transaction, but other similar transactions in terms of size to the Empire deal, we certainly looked at.
So there's quite a broad range of different types of transactions, both lease acquisition as well as M&A and sale-leaseback opportunities that we're trying to generate that we underwrote during the year.
In terms of cap rates, what I'd say is we continue to see a significant amount of capital looking at deals on our asset class, coming from all types of either institutional buyers and the 1031 markets.
I think the cap rates continue to be aggressive.
And while there is certainly been a recent spike in rates, and you'd expect to see cap rates moving along with that, I think there is certainly a lag in the market as we've not seen cap rates really slide up to meet that increase in borrowing costs.
Yes.
Sorry.
Yes, sure.
The market for credit transactions has been in the mid to high 6s, so call it 6 3/4 up to 7 3/4.
It's a range I've quoted in the past and I really don't think you've seen a tremendous amount of movement across that yet.
Obviously, you expect there to be some at some point, but I do think, given the size of the assets, the strength of the 1031 market, I think you'll see maybe more of a delay than you would otherwise expect.
Well, we typically lead with convenience and gas, right.
That's the backbone of the company.
That's the history of the company.
We certainly widened it to look at more auto-related themes.
We've looked at and acquired during the year some other auto-related sites, such as the Jiffy Lube, which <UNK> talked about.
The Applegreen deal included 5 stand-alone Burger King restaurants.
So those are now fixed properties that are in the portfolio.
So we certainly cast a little bit of a wider net.
The car wash sector is one that we've been studying and that we're somewhat familiar with given that a lot of our CNG locations have carwashes on them.
So we're certainly casting a bit of a wider net, but still being at the core that the convenience and gas brings.
Sure.
We said we're comfortable operating in the 4.5 to 5.5 range.
We were just under 4 on a fully pro forma basis at year-end.
So I think there's a little room to run on the leverage.
But the company has always been conservative.
And I don't think that's something that we anticipate changing.
Yes, that's a great question.
The other income number this year for the year was $8.5 million.
A lot of that was money that we took in from either insurance reimbursements or legal settlements and judgments.
If you look at the last page on our earnings release, where there's a reconciliation of net earnings to AFFO, you can see the big swing, the biggest of which was $6.381 million from legal settlements and judgments.
And that's the geography on the income statement.
Those are income streams that are due to individual cases or individual matters that are hard to predict the timing of and/or ---+ and quite frankly, those which are one-off in nature and that we don't expect to recur with any sort of frequency or predictability.
Thank you all for joining us for our year-end conference call for the year 2017.
We look forward to a productive 2018, of course, speaking to everyone again when we report our first quarter in May.
