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Executives

Joshua Dicker – Secretary, Senior Vice President and General Counsel

David B. Driscoll – President and Chief Executive Officer

Analysts

Anthony Paolone – JPMorgan

Brett Reiss – Janney Montgomery Scott LLC

Joshua Bederman – Pyrrho Capital

Andrew Jones – NorthStar Partners

Getty Realty Corp. (GTY) Q1 2013 Earnings Conference Call May 3, 2013 9:00 AM ET

Operator

Standby we’re about to begin. Good day, and welcome to Getty Realty Corp First Quarter 2013 Earnings Conference Call. Today's conference is being recorded.

At this time, I’d like to turn the conference over to Mr. Joshua Dicker, Vice President, General Counsel and Corporate Secretary. You may begin.

Joshua Dicker

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 March 31, 2012. The 8-K is available on the investor relations section of our website at www.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 include those made by Mr. Driscoll regarding the financial guidance for calendar year 2013 and the company’s acquisition prospects.

We caution you that such statements reflect our best judgment based on factors currently known to us and then 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, 2012 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 maybe made in the course of this call.

With that, let me turn the call over to David Driscoll, our Chief Executive Officer.

David B. Driscoll

Thank, Josh. And prior to starting my formal statement, I want to mention some of the other officers of the company here on the phone. With me today with Josh Dicker; Mr. Leo Liebowitz, our Co-Founder and Chairman is with us; our Chief Financial Officer, Tom Stirnweis and Kevin Shea, our Executive Vice President are all on the call.

And good morning, everyone, welcome to our call for the first quarter of 2013. I actually went back and counted to make sure, so I can confidently state that this is our ninth quarterly earnings call since our former major tenant Getty Marketing began moving down its unfortunate path towards liquidation.

Marketing (inaudible) dominated my remarks and our results in most of those prior quarters and is still with us today whether it would be a bankruptcy, the repossession of the portfolio and even now as we continue to work on the repositioning; our consistent theme these past nine quarters has been marketing. But this quarter, I think the theme isn’t just about marketing any more.

Consider that despite ongoing stubbornly high costs incurred in the reposition during the quarter, our reported results are beginning to reflect the new run rates for the business, the underlying business that we think of us as the new Getty. In additional with our refinancing complete, we have returned our focus back to the path towards growing our company to accretive acquisitions. We are hopeful to be able to report results from this effort to you very soon.

Turning to our earnings release, we reported net income of approximately $10.5 million and FFO and AFFO of $0.25 and $0.18 per share respectively on revenues of approximately $24 million. During the first quarter of last year, we reported net income of approximately $6.5 million, $0.31 a share of FFO, $0.29 per share of AFFO on revenue of approximately $27.5 million.

Rather than trying and spending a lot of time trying to create a bridge between these two periods, I think it’s better to just observe that in light of all the change that has flowed through our portfolio and our company, the comparisons of our current and future results versus prior quarters, even the fourth quarter of 2012 was simply not useful. Rather, I think it’s more instructive for me comment about some of the major items this quarter that vary from where we think our run rate will settle out on a future basis.

For example, our revenue this quarter was adversely impacted by lease start ups that occurred later in the quarter or mid quarter than we anticipated. Those leases, which we anticipated would have started at the beginning of the quarter have commenced now, and the net result was to reduce our overall revenues.

In addition, revenues were adversely impacted by low margin, staff margins realized for properties remaining in our interim supply arrangements this quarter. In addition, expenses remained stubbornly high during the quarter. This has mainly came from two areas, legal costs associated with the repositioning related to litigation items and maintenance costs for properties remaining in our interim supply agreement. We expect the litigation cost will begin to diminish as the year progresses, but we do not expect a material decline until the third quarter. I will discuss actions we are taking with respect to interim supply locations further on in this – in these remarks.

On the other hand, our interest cost this quarter was slightly lower than we anticipate going forward, reflecting additional cost inherent in the long-term fixed rate portion of our refinance again closed mid quarter on February 25. During the past two months, we have taken a number of actions related to the properties remaining in interim supply that we will – believe will provide both near and long-term benefit.

Following, a property-by-property analysis, we have commenced to process to dispose approximately two-thirds of that portfolio. While we cannot control the timing of the sale of these non-strategic assets, we believe that the benefit from the distribution will strengthen our long-term outlook. In the meantime, we are changing the terms of the interim supply arrangement on the majority of these locations.

We believe this change will increase their contribution to us in the near-term both by increasing revenues and by reducing our costs. Following that property-by-property review, we further concluded that maybe interest from distributors believe the remaining third of this portfolio and here too we have commenced a process to market these locations. Again, it is our intent to try to maximize the value, but we cannot control the timing of either the releasing or even the outright sale of these locations should they be sold.

Our other disposition efforts had gathered momentum this quarter, resulting in the closing – resulting in closing the sale of more than 65 locations year-to-date, okay, of approximately one closing per week day. We will continue to pursue additional sales as we move through the end of the year and reduced the 160 properties, for example, that had no tanks, where we started last year to a much smaller number by the end of this year. Measurable progress is also being realized in our terminals disposition process, and we anticipate being able to provide you updates as we reach closure.

Environmental remediation area is another area of focus for us and investors in growing cost for us particularly in light of the reposition of the marketing portfolio. As I have previously stated, GAAP accounting for environmental costs has become very complex. Accrued non-cash expenses flow through our impairments and our depreciation and amortization expense.

The headline for environmental this quarter is that our overall liability decreased by approximately $422,000, even though our cost estimates increased by approximately $1.5 million as a result of contaminations discovered in the course of tank removals.

In addition during the quarter, we actually spent approximately $1.6 million, which is approximately what we anticipated for this seasonally low quarter for environmental spend. Our general and administrative expenses during the quarter were positively impacted by approximately $1.9 million of receipts from marketing, reflected as a reduction of bad debt expenses, which is recorded in G&A.

These receipts actually reduced our reported G&A, which approximately legal expenses previously discussed also remain slightly higher than we expect on a run rate basis. During the course of the year, we expect to see modest reductions in G&A, which will result from our disposition program.

However, we also anticipate beginning to incur costs in connection with our systems to handle the increased level in intensity required by our asset management activities in the coming quarters, and this most likely will offset any cost reductions we realize.

Finally, as I mentioned in the last quarter, we have begun to reinitiate our growth efforts. There remains considerable competition for acquisitions of quality portfolios, and there are fewer large portfolios coming to market than they were in past few years. We intend to respond to these factors by increasing our marketing efforts and stepping up our creativity while remaining disciplined in our underwriting process. We are hopeful that we are going to provide you with some news on progress and acquisition sometime in the coming quarters.

With that insight, let me ask the operator to open the call for questions, because I’m sure I confused something here we didn’t explain it correctly.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Anthony Paolone with JPMorgan.

Anthony Paolone – JPMorgan

Dave, you mentioned $1.6 million spent on environmental in the first quarter. Can you give us a sense of – you mentioned that being seasonally low like what that number might be over the balance of the year, or where you think the run rate is?

David B. Driscoll

It’s seasonally low, because it’s winter and you’re taking about actually going outside and digging things and with frozen ground and things like you can do that. I think the general pattern, Tony, is roughly 20% to 25% of your spend that goes on in the first quarter if that give you some way to do some [application].

Anthony Paolone – JPMorgan

Okay. And is the $1.6 million – I know the environmental item on the income statement itself has some items within that, but is the $1.6 million like in addition to that type of a number, or if we're trying to think about the cash flow, do we add back the environmental expense that's on your P&L and take out the $1.6 million? Does that make sense?

David B. Driscoll

You can’t add back the entire – you want to add back the environmental administration expense net of the increase in the liability and the accretion. And then you could – then you would be doing the correct. I think to get to (inaudible) your tax number then I think you are getting closer to the correct number.

Anthony Paolone – JPMorgan

So would be the $1.1 million net with the $400,000 I think that you had mentioned?

David B. Driscoll

No, it was a little bit more complicated than that. Basically what we ought to do is offer to do a little tutorial and put something out on environmental, because it's difficult to like one from here and one from there and mix and match and get to some sort of an accurate number. So if you could let me – leave that with me and we'll put something out on that in the near-term, I think that would be useful.

Anthony Paolone – JPMorgan

Okay. That would be great. Another question you mentioned sort of the lease is starting later in the quarter. Can you quantify just what we would need to add to sort of net revenues to capture like the full quarter impact?

David B. Driscoll

I don’t have that number in my finger tips. Chris, can you jump on and maybe give us a number there?

Joshua Dicker

It’s mainly the BP leases that started mid-quarter.

Anthony Paolone – JPMorgan

Okay. Thus we’re previously…

David B. Driscoll

They were previously announced, but it took them a little time to – just as it takes all large organizations to sort of take – to actually go from the time they signed the lease for the time they kick over the property and start paying rent, it took them a little longer and then you take some of the others, the thing about working with large organizations.

Anthony Paolone – JPMorgan

Got it. Okay. So we will just look up the BP lease then. And then you talked – I got a little confused over kind of what's held for sale? Like the 110, like which ones of those are some of the ones that are under interim supply contracts versus…

David B. Driscoll

Let me be clear about that. The 65 dispositions all came out of the de-tanked properties, which I think now we are up around 100 of those have actually been closed and sold. The 110 are all interim supply properties. Most virtually all those have tanks in them, although we are taking some tanks out prior to with the sales of the property fleet, we can consider that the 110 to be on essentially new property out for sale.

Anthony Paolone – JPMorgan

Okay, so that is all in discontinued ops in terms of those earnings?

David B. Driscoll

That’s correct.

Anthony Paolone – JPMorgan

Okay, your straight line rent in the quarter, the non-cash adjustment FFO is that $2.4 million. And if we go back to last quarter when you gave guidance for FFO AFFO, if I just take the mid point, the spread between those two was about $4 million I think and so you did $2.4 million in the first quarter. So is that 2.4 sort of the right rate or is that a drop off in the next few quarters?

David B. Driscoll

I think for the rest of this year, it’s probably pretty close to a good rate I think it will change again next year, if not the difference between AFFO and FFO which is primarily at the straight line rent, it’s not a linear curve through the fifteen years.

Anthony Paolone – JPMorgan

Right. But the 2.4 over the next few quarters is a good number, you think?

David B. Driscoll

Probably a good number for the rest of this year.

Anthony Paolone – JPMorgan

Okay, and then I know you guys have it up for sale, the assets on 10th Avenue in Manhattan; is that house not coming along?

David B. Driscoll

Well, we received achieved a great deal of interest in the property and we’ll continue to work diligently in the sales process and unless – what else I can say. I thought we had it listed for less than what was in your report. But I don’t want to get smart with…

Anthony Paolone – JPMorgan

If we get our number – thank you for the help.

David B. Driscoll

Okay, you welcome.

Operator

(Operator Instructions) And we’ll go to Brett Reiss with Janney Montgomery Scott.

Brett Reiss – Janney Montgomery Scott LLC

Good morning gentlemen.

David B. Driscoll

Good morning, Brett.

Joshua Dicker

Good morning.

Brett Reiss – Janney Montgomery Scott LLC

The outstanding landlord and tenant suits that you’re having to do – a lot of my lawyer clients complain about because of lack of funding that some of the court systems are very slow and some bordering on dysfunctionality. Is that a challenge for you guys in what you have to accomplish there?

David B. Driscoll

Brett, with matters in front of court, I’m going to only say that I consider the justice department to be an extremely affected system, manned our people who are doing their absolute best to bring justice on a timely basis for all parties and transactions.

Brett Reiss – Janney Montgomery Scott LLC

Okay. And just the – could you just update us a little bit on that fraudulent conveyance actions that I think the trustee is pursuing?

David B. Driscoll

The trustee is pursuing short-term demand action against, the short-term demands and a number of other actions against Luke Oil and former officers and directors at GPMI. That is moving on time as it always has been towards the trial. That should occur in the very near future, did I say, six to eight weeks. But much more than that, I prefer not to comment.

Brett Reiss – Janney Montgomery Scott LLC

Great. All right, thank you for filling in my questions.

Operator

And we’ll take our next question come Josh Bederman with Pyrrho Capital.

Joshua Bederman – Pyrrho Capital

Few things here. One, just high level, you mentioned that your revenue was a little low. Your expenses were high, but you don’t expect those to really to go down. And your interest is a little low. Net-net, should we just think of what we’re seeing here on that front just kind of as a good run rate in terms of revenue, operating expenses, and interest expense kind of offsetting each other?

David B. Driscoll

No, I think that net-net – we’re hopeful, let me put it this way. The net-net – there’s an upward slope on that curve.

Joshua Bederman – Pyrrho Capital

Okay, so we’re talking like $500,000 or something, on that basis?

David B. Driscoll

Yeah, my answer to this is, that this is – you want to begin to see good run rate here, but this is not the run rate.

Joshua Bederman – Pyrrho Capital

All right.

David B. Driscoll

That is my comment.

Joshua Bederman – Pyrrho Capital

Okay. So it should be a little higher there. But then your G&A was about $2 million artificially low. So net-net on the run rate basis, at least, for the near term, we should see your kind of bottom-line about a $1.5 million lower?

David B. Driscoll

Again, I think net-net going forward in the near-term, I think the bottom line, is in an upwardly sloping curve.

Joshua Bederman – Pyrrho Capital

Upwardly sloping, – okay, even after accounting for that G&A thing?

David B. Driscoll

Yeah.

Joshua Bederman – Pyrrho Capital

Okay. All right, thank you. And then next, can you comment on the acquisition pipeline?

David B. Driscoll

As I said that – in contrast to years past there seems to be less, certain large portfolio is out there. There are other portfolios out there. We’ve identified some. We’re working very diligently on those. There’s also more competition out there. That’s couldn’t surprise to anybody in the finance business. Ben Bernanke has seen that there is plenty of cash around for everybody but we are working very hard in a disciplined fashion towards bringing what we think are quality properties in to our hold that can be acquired on an accretive basis for our shareholders.

Joshua Bederman – Pyrrho Capital

And how big are these portfolios that you are looking at?

David B. Driscoll

They range from an aggregate of $4 million, $5 million on the low side to, I don’t think something as $100 million, but certainly more than $50 million on the high side.

Joshua Bederman – Pyrrho Capital

Okay. And sorry, just jumping back to my first question. I was just kind of writing this down, and I'm trying to figure out exactly how the bottom line could be going up if you're talking about, let's see, interest expense that, in and around, sorry, a few million dollars. That was a little low, so that goes up by, can't go up by that much. Revenue at $24 million, you're talking about one piece that kind of goes up by – it can't be more than $0.5 million to $1 million, but your G&A goes up by $2 million. I don't really see how you guys…

David B. Driscoll

I’m not sure where I – I hope I didn't communicate that I thought our G&A was going up by $2 million.

Joshua Bederman – Pyrrho Capital

Well didn't you say you have $1.9 million of receipts from Marketing that were one-time?

David B. Driscoll

Yes, but with the additional receipts coming for Ben and the same time there are – we introductions in the G&A line that could occur with beyond that order.

Joshua Bederman – Pyrrho Capital

I see. Okay. So when you talk about a run rate for G&A, this quarter is good, it's not this quarter excluding the one time of the $1.9 million?

David B. Driscoll

That’s – I think that’s correct, yes.

Joshua Bederman – Pyrrho Capital

Okay. Thanks. And then lastly, you guys received a letter from U.S. Representative Jerrold Nadler about representing a bunch of the tenants who – operators who have grievances about commissions they are receiving on gallons of gasoline that haven't changed in 15 years, strikes, et cetera. Can you comment on that, please?

David B. Driscoll

Well, I – the way I would comment on it is – first, we don't comment on it, but I’m going to make a very small comment, which is what you said was we received a letter, I believe, isn't that correct?

Joshua Dicker

Yes.

Joshua Bederman – Pyrrho Capital

That’s what I read in the newspaper earlier.

David B. Driscoll

Yeah, I understand. So, that’s what I read in the newspaper too. What I would ask you is if you had seen that letter, would you send me a copy of it? Because we haven't seen it.

Joshua Bederman – Pyrrho Capital

Okay. All right, so you did not receive this letter. Have you heard anything from any of the – from the U.S. Representative's office about this?

David B. Driscoll

I open my mail everyday. That doesn’t mean it didn’t come, but we haven’t seen anything.

Joshua Bederman – Pyrrho Capital

Okay.

David B. Driscoll

I read in the paper what you read in the paper.

Joshua Bederman – Pyrrho Capital

Okay, so – but have you heard anything from your operators as – have there been any strikes? Have you heard anything from your operators about this issue?

David B. Driscoll

So first of all, they are not our operators, right.

Joshua Bederman – Pyrrho Capital

Okay.

David B. Driscoll

Those are operators at stations that are operated essentially by our tenants. And we are sure of where we are that some of the operators have made some moves in the present, done some things and we respect their rights to try and do what they can for their business position. Much more than that, this – we are almost not involved in this. We are not involved in this, and so it really wouldn’t be appropriate for me to comment.

Joshua Bederman – Pyrrho Capital

Okay. All right. Thank you.

Operator

(Operator Instructions) And we’ll take our next question from Andrew Jones with NorthStar Partners.

Andrew Jones – NorthStar Partners

Hi. Good morning.

David B. Driscoll

Good morning

Joshua Dicker

Hi, Andrew.

Andrew Jones – NorthStar Partners

I was just wondering if you could maybe give us some color on the overall portfolio stations, the non-Marketing stations, how they're doing, and the portfolio in general? Because we're just trying to – anxious to see what you guys are going to look like on a run rate basis, and how close we're getting to that? So it might be helpful.

David B. Driscoll

Sure. The non-Marketing stations are doing just great. They're essentially performing as expected, as advertised, solid as a rock. Underlying business pretty much across the board is doing very well in those stations, which is to say that our tenants and even their sub-tenants are performing pretty well. You see a fair amount of variability, volatility, if you will, in gasoline margins, which are very important to our tenants and sub- tenants. We are in a period now of pretty positive gas margins, consistent with gasoline prices on the street falling. And you can – you guys who – particularly the people who live in New York, which is why the – and why I can this, you can see that quite clearly because there are variations on the street that I compete driving around the greater New York metro area of almost $0.40 a gallon, and I’m not even talking about going New York to New Jersey. I'm talking about staying inside New York where you got the same traffic, which has shown you that some guys are really able to maintain margin at the present time in what is otherwise a generally declining gas price market. Is that, what you were looking for?

Andrew Jones – NorthStar Partners

Yes, and I think – were you guys going to come back with the number on the revenue impact? Because it would be great to know what kind of – what run rate revenues are on the portfolio now. I know that there's still going to be moving pieces for the next couple of the quarters, but anything particular as you guys are – if you're starting to look a the acquisitions and stuff, to have the stock reflect the value of what you guys have would probably be helpful in your cost of capital. So I'm just kind of curious if you could tell some more about the run rate revenues for everything that you have leased in a way that you're happy with and will be go forward?

David B. Driscoll

I hear the comment, and we’re going to try to provide something that will give you a way to get a handle on that.

Andrew Jones – NorthStar Partners

Okay. And my last question is, I'm sure you guys are aware of the Valero spin-off, CST Brands. And I was just wondering, they provided quite a bit of information about margins on gasoline sales and seemed like some very high numbers. Is any of that instructive for what you guys should be able to do when you have control of the portfolio back and get it repositioned? Or is that just – is the C store business is very different and not comparable?

David B. Driscoll

It’s not that the C store business is different. It's just that Valero is spinning off what is essentially an operating business that derives its revenues and its profitability through the operating business. And we are a landlord who collects rents from people, who are driving themselves off the profitability of the fuels business, if you follow what I saying.

Andrew Jones – NorthStar Partners

Excuse me.

David B. Driscoll

We have to understand what their business is and how their profitability works. In order to value our business we are sort of more of a higher – higher order credit, higher up in the security chain, so that we are insulated from the volatility.

Andrew Jones – NorthStar Partners

Yes, I get that. I mean, you guys have part of the economics piece that – of the whole ball of assets that they've got. And I guess just – but ultimately what people can afford to pay in terms of rents reflects these overall account picture, so I was just...

David B. Driscoll

Actually, right. If we take in to account that, for example, where the Valero spin-off will depend on its quarterly earnings, depend on margins quarter-to-quarter. When we look at the property, we underwrite it based on three-year average margins in order to try and spill out that volatility because we are looking for sort of a base line level and then we are looking for coverages over and above that.

Andrew Jones – NorthStar Partners

Right. Okay. All right. Thank you.

David B. Driscoll

Yep.

Operator

I’m showing no question. There will be a follow-up from Anthony Paolone with JPMorgan.

Anthony Paolone – JPMorgan

Receipts, I think you had mentioned that net into G&A. What exactly are those?

David B. Driscoll

Well, just the (inaudible) when they went down, they had assets. Then they showed those assets based everything from deposits that they had which give suppliers to residuals on insurance claims that they expected to collect or reimbursement from (inaudible). And I think those dollars flow into GTMI they can right back up because of our single priority. When those dollars come to us, (inaudible) of debt expense that we took back in 2012 for the marketing rent that we booked as revenue but did not receive.

Anthony Paolone – JPMorgan

Okay. I understand. Do you have any guess as to what ultimately you think you will recover there?

David B. Driscoll

Ultimately the super priority which started around a number in excess of $10 million I think it’s recoverable in it’s entirety at some of those trends but it will take several years.

Anthony Paolone – JPMorgan

Okay. So the first quarter suggests then you got about another $8 million or so to go? Is that the way to think about it?

David B. Driscoll

I think that’s a priority, yes.

Anthony Paolone – JPMorgan

Okay. Great. Thank you.

Operator

This concludes our Q&A session. I’d now like to turn the call back to management for any additional or closing remarks.

David B. Driscoll

No other than to thank you for your time and your interest in our company, we are – we look forward to being in contact soon and hope you all have great day and great weekend.

Operator

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

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