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Getty Realty Corp. (NYSE:GTY)

Q2 2013 Earnings Conference Call

August 8, 2013 9:00 am ET

Executives

David Driscoll - President, Chief Executive Officer

Analysts

Yasmine Kamaruddin - JPMorgan

Operator

Good day, and welcome to the Getty Realty Corp Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded.

At this time, I’d now like to turn the conference over to Mr. David Driscoll, CEO and President. Please go ahead.

David Driscoll

Thank you, Operator. Our General Counsel, Josh Dicker cannot be with us today. So, I’m going to play his role as well as my own. And just talk to you a little bit about the disclaimer which is posted. Thank you all for joining the Getty Realty’s second quarter 2013 quarterly earnings conference call. Yesterday evening, the company released its financial results for the quarter. 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 including those that I may make regarding financial guidance for the calendar year of 2013, expected asset sales and reinvestment of proceeds, cost reductions, future company operations, run rate stabilization and the company’s acquisition prospects.

We caution you that such statements reflect our best judgment based on the 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 these 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 I would like to start my formal remarks and then we will move on to questions.

We have achieved a number of significant milestones since our last call and I want to make sure that I highlight those headline events and some of the longer terms implications for each of them for you here today.

The biggest event of course was the settlement of the Lukoil litigation. Given the legal nature of this, I need to refrain from making any detailed comments more than to say that we are satisfied with the results and are moving on.

The headline is that we expect the settlement result in approximately $32.5 million of gross proceeds and possibly more later as unsecured claims are adjudicated and distributed to unsecured creditors.

In addition, the timing and revenue recognition around this settlement effectively moved the entire technically driven waiver issue in our credit agreement. We are and have been in compliance with that agreement and the previously disclosed waiver provisions are no longer in effect.

Furthermore, longer term the settlement will almost immediately result in reduction of significant legal cost we were incurring in connection with this litigation and enable management to commit additional time and resources towards our operations and pursuing additional avenues of growth going forward.

Speaking of opportunities, we successfully completed an accretive acquisition of 36 properties for approximately $72.5 million during this quarter. These properties are located in highly desirable metropolitan areas around New York City and Washington DC. We are particularly thrilled with this milestone as it marks our return towards accretive acquisition growth.

Going forward, we remain committed to growing the company. We intend to look at both existing and new paths to achieve that growth while staying mindful of our core industry focus, the macro environment and the competitive landscape that we operate in.

Additionally, we continued down the path of judiciously recycling capital and utilizing proceeds to fund the May acquisition and reduce our outstanding debt. To that end, we completed the sale of one of our New York City locations 24th Street and 10th Avenue for approximately $23 million. This sale attracted considerable interest and the price exceeded our expectations.

With effort and forethought, I’m also pleased to report that we had previously structured the sale as they reserve 10/31 against our May 2013 acquisition. That means we will not recognize any gain on the sale and essentially have already reinvested in that proceeds into the accretive acquisition we did in May. The return on the invested proceed on that particular location is expected to be approximately 9 to 10 times the return we were earning on the location prior to its sale.

Beyond the 24th Street sale, though quite a few, we have closed approximately – the sale of approximately 18 properties including 3 terminals earning approximately $28 million of proceeds. Virtually all of these proceeds have also already been reinvested. Our remaining transitional properties generally had a net negative contribution of approximately $2.5 million during the first six months of this year. We are aggressively repositioning these properties (assets are re-leasing over this) positions and I expect to be able to report significant progress in this effort in the coming quarters.

Turning to our operations, we reported revenues of approximately $25 million for the quarter which was comparable to the prior year quarter. Net income for the quarter was approximately $12.7 million or $0.38 per share of FFO. And the AFFO was $0.34 and 36% share respectively.

Our net income is distorted because of the positive impact of some of the Lukoil settlement that was booked in the quarter and the high volume of disposition activity. FFO and AFFO are not impacted by dispositions but both have approximately $0.19 per share of Lukoil settlement in them.

We anticipate that additional one-time benefit will contribute to our results in the third quarter of 2013 as well. The settlement and disposition are positive events but we are also mindful that none of these increases are run rate transparency.

I want to offer the following (help) with that; revenues for the second quarter are about where we anticipate they will stabilize going forward before taking into account reinvestment of proceeds, we realized from dispositions or new leases occurring in the second half of 2013.

Expenses remain high during the quarter. This mainly came from three areas. Rental property expenses, G&A and allowances. Reflecting disposition that occurred earlier in the year, rental property expenses are already reflecting an approximately $1.1 million decline from Q1 of 2013. While we are making progress, we are not ready to provide guidance on the G&A yet, but anticipate our efforts will be focused on reducing this expense as we move forward. But (inaudible) G&A is that it will decline in the latter half of the year most tangibly from a reduction in the litigation expenses that were being incurred in connection with the Lukoil litigation.

During the quarter, we also announced that we plan fixed charges related to our lease with NECG Holdings. This lease has been materially impacted by the dissident Connecticut dealers. We have essentially won the litigation against those dealers completely in Connecticut Superior Court but enforcement now have await an appeal process. As a result to these interminable delays, we have elected to clean the desk completely with the NECG and are engaged in a total restructure of their lease.

Included in this quarter’s G&A was a previously disclosed debt reserve associated with that least of $1.2 million and we also booked $1.5 million a non-cash allowance or deferred rental revenue in that lease both of which are one time charges. We remained confident that the litigation will be resolved in our favor and that we will be able to successfully restructure the NECG lease thereby increasing the revenue from the portfolio while eliminating the associated litigation cost but we now anticipate this may not occur until 2014.

On the environmental front, our environmental remediation efforts -- another factor and growing cost for us in light of our reposition of the marketing portfolio. As I previously have stated GAAP accounting for environmental cost has become very complex, accrued non-cash expense flows through our impairments and our depreciation and amortization expense.

The headline for this quarter is that our overall liability decreased by approximately $500,000 even though our cost estimates increased by approximately $2 million as a result of newly discovered contamination discovered in the course of tank removals.

In addition during the quarter, we actually spent approximately $3.7 million, which is approximately what we anticipated for this seasonally warmer quarter for environmental spend.

Turning to our acquisition pipeline and what is undeniably a frosty financing market we are seeing new and in competition for financing a quality portfolio. There are fewer large portfolios coming to market than they were in the past few years. We are mindful that we are a long-term investors and intend to respond to these factors by increasing our marketing efforts, stepping our creativity and remaining disciplined in our underwriting process.

Finally, I would like to address our guidance that we provided at the time of our fourth quarter release. Given the proceeds from settlements, we may exceed our previously provided FFO and AFFO guidance for 2013. However, due to certainty surrounding the timing of the proceeds, the amounts to be received and the characterization of the income we are not prepared to update our guidance at this time. Once we had more clarity, we will provide an update.

So that’s the end of my formal remarks. With that I would ask the operator to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

And we will take our first question from Yasmine Kamaruddin with JPMorgan.

Yasmine Kamaruddin - JPMorgan

Hi.

David Driscoll

Hello.

Yasmine Kamaruddin - JPMorgan

I just have a – hi, I just have a few questions. So, first on the NEGC issue that you have right now how many properties exactly are leased to NEGC in total?

David Driscoll

82 I believe.

Yasmine Kamaruddin - JPMorgan

So 82.

David Driscoll

84

Yasmine Kamaruddin - JPMorgan

Oh, 84, okay.

David Driscoll

84

Yasmine Kamaruddin - JPMorgan

So, according to your release 26 of them are problematic is that it?

David Driscoll

Approximately 26 of them are tied up in the litigation in Connecticut, that’s correct.

Yasmine Kamaruddin - JPMorgan

Okay, all right. Great. So for these 84 properties what is the total and cash and cap rent on an annual basis?

David Driscoll

I’m not sure we provided those numbers and so that one unnecessarily just like (inaudible) on a call right now --

Yasmine Kamaruddin - JPMorgan

Well, you can also tell me per property, what is the average cash and GAAP rent?

David Driscoll

My recollection is that the GAAP rent number is on the order of $5 million to $6 million, I don’t know that -- we can be anymore precise than that.

Yasmine Kamaruddin - JPMorgan

Okay, all right. And no color in the cash rent?

David Driscoll

Like I said, we decided that we are going to sort of sweep the whole deck on this thing.

Yasmine Kamaruddin - JPMorgan

Okay

David Driscoll

And we write the lease. So I think on a going forward basis, we will make a disclosure when we get that restructured which will give you a better idea what the run rate is.

Yasmine Kamaruddin - JPMorgan

Okay, all right. So for these 26 properties in litigation, is it fair to assume that these properties will be removed the lease?

David Driscoll

No, actually, I think it’s fair to say those are the once that are going to stay in the lease. It’s a very complicated situation, the 26, while they represent only approximately a little over 25% to 30% of the entire portfolio on account basis, probably represents 75% to 80% of the value of the portfolio on a value basis.

So, like I said, it’s a very complicated situation and the likelihood is in fact those are the properties that will stay in the restructured lease once we get through -- get -- frankly get occupancy of the properties back and our tenant NECG can view the times of repositioning of both properties that it wanted to do in the first place.

Yasmine Kamaruddin - JPMorgan

Okay, all right got it. All right and well, I know you said before that you don’t want to comment on the cash and GAAP rent specifically, do you have any color on -- as you go through the litigation what will those numbers be?

David Driscoll

No, not at this point because we haven’t finished our restructuring of that particular lease.

Yasmine Kamaruddin - JPMorgan

Okay, all right. Now moving forward to property expenses, so forth the second quarter, I know that it declined (inaudible) this, so which means that your NOI got better, so that’s great. So is that a good NOI run rate at this point for the properties that you have in your portfolio?

David Driscoll

No, because you see the decline occurred because during the quarter what we were doing is we were disposing, even during the first quarter. We were disposing our property that were mainly a drag in incurring most of the maintenance and other expenses in the property operating expense. So what you are seeing now in the reduction there is the effect of the dispositions of the re-letting of those properties. And that process, which you are seeing -- reflected in this quarter reflects properties that were disposed off in the -- early in the first quarter and frankly even in the fourth quarter of 2012. And at the beginning of the second quarter and you are going to see that continue to ripple through that line with the number going down as we continue to dispose the property through the rest of the year. And also make the additional comment that we expect that the pace of dispositions will -- if anything accelerate between now and the end of the year.

Yasmine Kamaruddin - JPMorgan

Okay, all right. So essentially the $1.1 million decline in property expenses, you mean, even be bigger for the third and fourth quarter?

David Driscoll

That is what we hope.

Yasmine Kamaruddin - JPMorgan

All right that sounds great. And those are all my questions. Thank you.

David Driscoll

You are welcome to -- comeback if you got anymore.

Yasmine Kamaruddin - JPMorgan

Okay. Thank you so much.

Operator

(Operator Instructions) I think we have no further questions at this time.

David Driscoll

Okay. Well, thank you all for joining the call. Thank you all for your continued interest in our company and we look forward to talking to you again in the fall.

Operator

And that does conclude our conference. Thank you for your participation.

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