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Getty Realty Corp. (NYSE:GTY)

Q3 2013 Earnings Conference Call

November 6, 2013 09:00 ET

Executives

Joshua Dicker - Vice President, General Counsel and Corporate Secretary

David Driscoll - Chief Executive Officer

Analysts

Juan Sanabria - Bank of America

Anthony Paolone - JPMorgan

Joe First - First Associates

Operator

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

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

Joshua Dicker - Vice President, General Counsel and Corporate Secretary

Thank you. Prior to starting the call, pardon me I would like to thank you all for joining us at Getty Realty’s quarterly earnings conference call. Yesterday evening, the company released its financial results for the quarter ended September 30, 2013. 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 includes those made my Mr. Driscoll regarding financial guidance for calendar year 2013, expected asset sales, cost reductions, future company operations, run rate 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 Driscoll - Chief Executive Officer

Thank you, Josh and good morning everyone. Welcome to our call for the third quarter of 2013. We remain on a consistent course that we charted earlier in the year lease or sell our transitional properties, reduced our operating expenses, redeployed capital and accretively grow our company.

I will go through the highlights of this shortly, but first I want to quickly comment on the results for the quarter. Our third quarter results reflected the material benefit of the Lukoil settlement that we announced earlier in the year. The settlement was accounted for in a variety of ways, which are described in greater detail in our 8-K earnings release, but the headline numbers that we received just shy of $32 million of distributions from that settlement with the possibility of additional receipts coming in, in the coming quarters.

Our reported revenues were approximately $29.2 million, which after adjusting for approximately $3 million of the settlement income that was accounted for as revenues was comparable to the prior quarter. Our net income for the quarter was approximately $42 million or $1.25 per share, which equates to FFO and AFFO of $0.63 and $0.55 per share respectively. All of these results reflect the material positive impact of the Lukoil settlement that was booked in the quarter. Net income also includes gains from our disposition activity in the quarter, which was mainly driven by the sale of a major terminal and our 24th Street location in Manhattan.

In addition, the quarter included several one-time charges, some of which are directly related to the Lukoil settlement and some of which are independent of it. When the impact of the Lukoil settlement and the dispositions are removed from our results, FFO per share and AFFO per share were $0.12 and $0.04 respectively after accounting for these charges. We think it was a very good quarter and the settlement is the result of a great deal of hard work by great many people. At the same time, we acknowledge that these results also obscure presentation of our core run rate. We believe now that as we move forward there will be far fewer one-time events to obscure these run rate levels in the future.

As we move forward, we remained focused on driving down expenses. To that end, we are starting to see success in this area that is reflected in our third quarter results. For example, third quarter rental property expenses and G&A even after backing out the effect of the settlement were all measurably lower when compared to the prior year and the prior quarter reflecting dispositions and re-letting the properties as we move forward. The good news is that we are still in the early process of achieving these expense reductions which will help contribute to future bottom line performance as we move forward.

We are also having great success recycling capital and leasing our properties. We closed or re-let 17 locations during the quarter and an additional 25 locations and the last of our large terminals during the month of October alone. Virtually all of these locations contributed to losses to our bottom line, so these sales and leases contribute immediately on the marginal basis. There is little new to report on the lease we are restructuring with NECG which covers most of our Connecticut-based operators. NECG continued to perform on our interim restructuring, but we will not be not be ale to conclude that chapter until the state – the Connecticut State Appellate Court has ruled on the appeal action brought by the defendant Connecticut dealers covered by the NECG leased. These dealers lost their case at the trial level but continued to squat on our properties without our permission. We do not expect the appeal to be ruled upon until sometime in 2014, but we remain confident that we will prevail in the end.

Now our environmental remediation efforts are another area of focus for us following the reposition of the marketing portfolio. As I previously stated GAAP accounting for environmental cost is very complex, accrued non-cash expenses flows through the impairment and depreciation and amortization expense. The headline for this quarter is that our overall liability remained confident from the prior quarter at approximately $45.2 million. Our cost estimates increased by approximately $4 million as the result of contamination discovered in the course of tank removals, but during the quarter we also spent approximately $4.4 million which is approximately what we had anticipated during this seasonally warm quarter.

Finally, there were also developments with respect to litigation, so we increased some reserves in that area. We have a solid growth pipeline despite the challenge of the effect of the easy money policy from the Central Bank. It is our intention to grow our assets, but to do so in a disciplined fashion taking into account the macro environment of too much liquidity. We remained mindful that we are a long-term investor and are diligently increasing our marketing efforts, while also stepping up our creativity to increase our assets in a thoughtful and accretive fashion.

Turning to our guidance for 2013, we believe our core run rate without benefit of settlements, disposition gains and other non-recurrings and unusual items remained in line with our guidance. In and – if you include – if you include the proceeds from the settlements we have already significantly exceeded our FFO and AFFO expectations for 2013, we are getting close to being able to provide greater clarity into our core operations. It is our expectation that our fourth quarter results will demonstrate a run rate that will represent a solid starting point from which we continue to grow the company over the longer term.

With those comments, I would now ask the operator to open the call for questions

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go to our first question from Juan Sanabria with Bank of America.

Juan Sanabria - Bank of America

Hi good morning.

David Driscoll

Good morning.

Juan Sanabria - Bank of America

I was just – how are you guys doing?

David Driscoll

We are great. Thank you.

Juan Sanabria - Bank of America

I was just hoping you can provide just a clean run rate number for G&A, it seems like its down to round a bit even trying to strip out the one-times you stipulated in your 8-K?

David Driscoll

It’s going to be difficult to come out and just give an explicit number until we get to the fourth quarter. I can tell you that based on the numbers that we look at it’s not – it’s lower than but right pretty much in line with what we saw in the second quarter, but I am not going to go much farther than that.

Juan Sanabria - Bank of America

Okay, that’s helpful. And then how should we be thinking about the environmental online, I know there was a big jump this quarter, is that kind of a normalized number? Is it really kind of like a seasonally adjusted number, because I think you mentioned more work because of warm weather kind of how should we be thinking about that maybe on an annualized basis to help us strip out seasonality?

David Driscoll

I think…

Juan Sanabria - Bank of America

On a P&L perspective.

David Driscoll

Well, on a P&L perspective, it’s actually relatively constant given where all of the lines in the GAAP statement flow through to it on a regularized basis. The spending itself is very lumpy, because a lot of it has to do with digging in the ground and you do digging in the grounds when the ground is not frozen, which is mostly in the warmer quarters of the year, but also you have the effect of the fact that you can’t do any digging in the ground or any of the stuff without regulatory approval. You submit your request for regulatory approval way in advance and regulators get around to giving them to you when they feel like it. And so that it’s difficult to predict. So the best answer I can give to you is that it’s relatively lumpy, but if you basically look backwards over a period of 10 or 11 quarters, I think you will see that the lumpiness starts to get to a line that’s a little bit more predictable.

Juan Sanabria - Bank of America

Okay, maybe I will touch base on that again. And then with regards to acquisitions, what kind of assets are you guys targeting, is it the same sort of assets you are doing, you are focused on now or you thinking about potentially broadening your horizons to other sort of triple-net assets?

David Driscoll

We remain focused on properties in the convenience and gas sector, where fuel supply is a critical component of the operating property. I will tell you if the convergence continues that and quick-serve restaurants start to become more active in the gasoline business that we wouldn’t some day end up with a bunch of Burger Kings that also have gas pumps upfront, but right now we think that where we can compete and where we have a specialized knowledge or special thoughts, if you will, is where you’ve got the regulatory, the environmental and the other issues around fuel supply that helps drive a business. And we think that, that’s a very good niche for us to be in and we think that there aren’t a lot of people who specialize in that and we can make money in that niche.

Juan Sanabria - Bank of America

Okay. And then just lastly with regards to those acquisitions in your core focus area, how should we think about you financing those? Can you just give us a snapshot of where you see capital rates and sort of your cost of debt given that you do have some headroom there?

David Driscoll

Well, our cost of debt right now is publicly available. It varies on a grid basis depending upon how much we have. We have obviously paid down a considerable amount of debt over the last four, five months and we are, as you say, have a lot of headroom to make acquisitions. So certainly, on a marginal basis, our cost of capital is relatively low. Cap rates themselves with compressed quality assets are trading, I mean, really high-quality assets are trading below a 7% cap rate. And I think part of what we are doing when I use words like being disciplined is that we are being careful to make sure with rates that low that we are making the right acquisitions of the right assets that had good residual values and good perspective upside and coverage.

Juan Sanabria - Bank of America

Okay. So you have been financing transactions with your line it sounds like?

David Driscoll

For now, yes, on a marginal basis.

Juan Sanabria - Bank of America

Okay, okay, great. Thank you, guys.

David Driscoll

You are welcome.

Operator

(Operator Instructions) It appears there are no other questions in the queue at this time. We do have one that just popped in, Anthony Paolone with JPMorgan.

Anthony Paolone - JPMorgan

Thanks and good morning.

David Driscoll

Good morning.

Anthony Paolone - JPMorgan

The risk of sounding lazy, can you maybe just help us what the 4Q implicit guidance, so that we are not making any mistake in kind of pulling out any of the sort of non-core items?

David Driscoll

I am uncomfortable, Tony, going any further than what I said in the call. I think that if you we believe that we are in line with the guidance that we issued. (indiscernible) we have already exceeded the guidance, but without the special revenue side things that we have received. When we look at our guidance even after taking hits for frankly a number of charges that we did not think we were going to anticipate we were going to have, we believe we will remain inside where we issued the guidance at the beginning of the year.

Anthony Paolone - JPMorgan

Okay, but if I look at that I think it was $0.94 to one or two so if I take the $0.98 midpoint, is it taking out $0.12 for 3Q, $0.34 for 2Q and $0.25 for 1Q I am just trying to understand like what that – like what the actual numbers were that you think of is being comparable to that guidance for you?

David Driscoll

I think that there is dispute, when we look at Q3 I don’t think that we look at Q3 as something which you can simply strip out the settlement and call it a day. Q3 contained in addition to the settlement and some of them – some charges frankly is a direct result of this settlement. It included some charges that that also requires stripping out to get to what I would call the run rate or what the true AFFO number is. Problem that I can’t – the awkward part of this is that I can’t walk you through that on the phone right now or in the room next week in San Francisco.

Anthony Paolone - JPMorgan

Okay. If I take out the items in G&A we will take $6.3 million, how much of that in the quarter would you say is kind of not the real number that we should expect going forward but maybe still has inflated costs or something perhaps in it?

David Driscoll

The safe answer to that while trying to get you where you want is more than 10%.

Anthony Paolone - JPMorgan

Okay and then so the actual cash on the environmental study actual cash out the door that was the $4.4 million in the quarter?

David Driscoll

Yes.

Anthony Paolone - JPMorgan

Okay, was there any just general CapEx that you have spent in the quarter on assets?

David Driscoll

The minimums we – you will start to see more of that as we go through with some of the new leases with tank replacement cycle. The great deal of that requires all sort of regulatory approval not only at the state level but at the local level. If you want to do a major renovation you got to get the town’s permission. So you will start to see that I think occur in 2014 and 2015 where we will be making CapEx contributions to properties, but they won’t show up in the CapEx line. Obligations have already shown up in the rent line in the straight-line. I mean it’s kind of for – a part of straight line rent. So the technical answer to you r question is no.

Anthony Paolone - JPMorgan

Okay. And then just looking through the held for sale stuff looks like post the items after the quarter you had 105 assets left to go. I guess one is, are any other 42 properties going through eviction process considered held for sale or in that bucket are those all just consolidated at this point?

David Driscoll

I think they were all consolidated at this point. The problem with literal answers to these questions is that with 105 properties, I can virtually guarantee you that a handful of those are in an eviction process. They may not be in the Connecticut eviction process, but when you have that large number of things when you are dealing with street level assets, you are going to have the whole spectrum of our properties inside that portfolio.

Anthony Paolone - JPMorgan

Okay. And any sense as to what that 105 left is worth like just rough brackets around this value?

David Driscoll

I am going to dodge the question by saying probably but I actually have not looked at that recently, so I would be speculating wildly to give you an answer on it, but it’s not like we don’t have the number. I could look at it and I will try and find some way to give guidance on that in the future so that everybody can hear it.

Anthony Paolone - JPMorgan

Okay and then given sort of the settlement items and so forth any sense as to what 2013 taxable net income might look like just to get a sense as to whether your dividend – whether you have a dividend situation or not?

David Driscoll

It’s a really good question. I mean it’s a really good question and one that we spend a fair amount of intellectual time on. The best guidance I can give you right now is that we – it looks like we do not have a major under, over distribution issue with respect to tax. But once you move, it’s incredibly complicated as you move from GAAP to tax and the add-backs and the reductions and everything else, but it’s something we are very much on top of and we monitor quite continually.

Anthony Paolone - JPMorgan

Okay, great. Thank you.

Operator

We’ll go to our next question Joe First [ph] with First Associates.

Joe First - First Associates

Hi guys. Thank you. Sort of partially answer my question, I was just – wanted to ask about at what point do you think you might be able to raise the dividend at what stage over the next few months of what you are doing?

David Driscoll

See that’s the kind of question that guys on our end of the phone have to find a nice way to answer this, but the board always considers the relevant dividend levels and will consider raising or maintaining the dividends based on what we think our current performance is and what our perspective performance is, but to say much more than that is just not going to do, I am sorry.

Joe First - First Associates

Sure, that’s fine. And congratulations on the good work you have done so far. We really appreciate these investors.

David Driscoll

Thank you. Well, you are welcome.

Operator

We will go to our next question from (indiscernible).

Unidentified Analyst

Hi. Yes, I just want to follow up on that a little bit, intentioned your comment on potentially maintaining or raising the dividend, can you give us some color on what you guys ideally would like to have as kind of a payout policy? If I go back to Tony’s question, $0.98 in midpoint guidance, if you had $0.25 in the first quarter, $0.34 in the second and you reported $0.12 in the third, you are saying that there is probably some charges in there that you would take out relative to that guidance? Even if you don’t take anything out that leaves you with $0.27 of AFFO in the fourth quarter or sorry, the FFO you had an $0.08 deduction in the third quarter, we are doing FFO and AFFO. So even if you don’t add back any of those charges for the third quarter, I see that you are not covering your dividend on an AFFO basis for the fourth quarter likely that’s actually going to look worse given that you are adding back some of the third quarter charges. So what do you think about dividend coverage and what’s your policy for payout going forward?

David Driscoll

I think a couple of things if I could answer them.

Unidentified Analyst

Sure.

David Driscoll

First, we pay a lot more attention to AFFO than we do FFO.

Unidentified Analyst

Okay.

David Driscoll

To be honest with you, don’t pay a lot of attention to FFO.

Unidentified Analyst

Right.

David Driscoll

See I mean, I don’t want to be cavalier about that, but that giving the effect of straight line rent, which is the main difference for us between AFFO and FFO, we just think AFFO is a better number.

Unidentified Analyst

Okay, I would agree.

David Driscoll

Okay. So second, the general policy with respect to setting a core dividend rate is that we want that dividend covered taking into account what we think our prospects are going to be over the next say 8 to 12 quarters.

Unidentified Analyst

Okay.

David Driscoll

And I would suggest that we not only want to cover, but we want to cover by more than. We don’t want to be paying out 99% of AFFO, but I don’t want to get into them, the debate was 98% or…

Unidentified Analyst

Yes, that’s understood. Thanks.

David Driscoll

But what we want, we want coverage. And then finally again, as far as I can go and I know how frustrating with this put out on your side. At our current dividend rate, I am pretty comfortable that for the fourth quarter and frankly for the year on an AFFO basis, even not counting all this wonderful, it sounds money, because I used to refer to this as a lottery ticket and we cashed the lottery ticket. We are going to cover that dividend.

Unidentified Analyst

Okay. Sorry just to kind of close that loop, that would imply something – that would imply $0.20 or more of AFFO in the fourth quarter, up from your $0.04 this quarter?

David Driscoll

We take – I am not answer – I am not disagreeing with you. And also, but things can still happen, there is six weeks left in the quarter.

Unidentified Analyst

Right, okay. Thank you.

Operator

There are no further questions in the queue. At this time, I would like to turn the call back over to Mr. David Driscoll.

David Driscoll - Chief Executive Officer

Well, I want to thank you all for hanging in with us over what has been a long odyssey and we look forward to next year where I think we will all have much more to say and we can be more direct in answering questions.

Operator

And that concludes today’s conference call. Thanks for your participation.

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