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Getty Realty Corp (NYSE:GTY)

Q4 2013 Results Earnings Conference Call

March 05, 2014 09:00 AM ET

Executives

Joshua Dicker - VP, General Counsel and Corporate Secretary

Dave Driscoll - Chief Executive Officer

Chris Constant - Chief Financial Officer

Analysts

Tony Paolone - JP Morgan

Juan Sanabria - Bank of America

Operator

Good day and welcome to the Getty Realty Corp Fourth Quarter and Year-Ended 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

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 and year ended December 31, 2013. The Form 8-K and earnings release are available on 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 statements. Examples of forward-looking statements include those made by Mr. Driscoll regarding lease restructuring, future company operations, financial performance and the company’s acquisition or redevelopments 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 fiscal year ended December 31, 2012 as well as our quarterly and other filings with the SEC and our Annual Report on Form 10-Ks for the fiscal year ended December 31, 2013 which will be filed soon 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 Dave Driscoll, our Chief Executive Officer.

Dave Driscoll

Thank you, Josh. Good morning everyone, welcome to our call for the fourth quarter of 2013 and the year end of 2013. The quarter and the year reflects steady progress and the objectives we set at the beginning of 2013, lease or sell or transitional properties reduce operating expenses, redeploy capital and accredibly grow our company. I will go through the highlights of the earnings shortly, but first I want to quickly comment on the results for the quarter and the year.

We produced solid results for the fourth quarter that resulted in a 9% increase in adjusted funds from operations to $0.24 per share on revenues of approximately $26 million. Unlike the prior three quarters and our annual results our fourth quarter was as expected relatively straight forward. One item I should call attention to is that AFFO did benefit this quarter from approximately $0.02 per share of non-cash, non-recurring reversals of accruals.

In the fourth quarter we continued executing on our transformation activities with 51 locations being sold and 15 locations moving into long term leases. The bottom line in progress is still being made and while we recognized that we still have work ahead finished the task at hand. The visibility into a core base line of revenue and earnings is finally emerging. We understand there are so big unknowns and that we are not yet finished, but we are much closer relative to the past few years. For the full year 2013, our results were still impacted by the ongoing transformation and resulted in AFFO of approximately $44 million on revenue slightly in excess of $100 million.

The items that most affected our full year earnings with the disposition of 145 transitional locations and the settlement of the Lukoil losses. Dispositions resulted in sales proceeds of approximately $83 million. The high impact items in this was the disposition of five terminals and the sale one of our Manhattan locations for reputedly the highest per square foot sales price ever recorded on the islands of Manhattan. The other major item impacting our results was the aggregate approximately $34 million, we received during the year from the settlement of the Lukoil litigation and other freight funds from GPMI's liquidating effects.

Although, we derived benefits resulting from the ongoing repositioning of our assets and from resolution of claims relating to GPMI in 2013, our results also reflect direct and indirect expenses incurred in connection with these and related matters including inflated property management costs, such as property taxes, maintenance and utility charges, legal and other professional fees and general and administrative costs associated with holding these low contribution properties.

While we acknowledge that we still have additional repositioning work to do especially in terms of the number of locations, the work that [has] been done through the end of 2013 resulted a measurable improvement and much better clarity as reflected in our fourth quarter performance.

Once again this quarter, there is also a little new to report; on the lease that we are restructuring with NECG covering most of our properties in Connecticut. The Connecticut Appellate Court has not yet ruled on the appeal of the action brought by the defendant Connecticut dealers who lost their cases at the trial level. We remain hopeful, that there will be a resolution from the appeals in 2014 and confident that we will prevail.

Nevertheless, this prolonged process has impacted our results relating to the NECG lease. We will not be able to achieve a permanent resolution until this ruling has made and we have now concluded that the lease will require a fundamental restructuring. As a result, we took a non-cash reserve to the entire amount of the accrued straight-line with the NECG lease during the fourth quarter.

I want to be very clear that this is entirely an accounting matter. It is non-cash and GAAP driven. The reserve we’re ticking this quarter solely affects an accrual that builds up because GAAP required us to recognize revenues on a straight-line basis rather than on an as receipts basis. In fact as previously disclosed, we reserved against gold for cash aspect this last June and our action this quarter is entirely a non-cash GAAP driven exercise. To underscore the non-cash nature of this action, our most important metric AFFO never included the effects of the straight-line rent accrual. So this action this quarter has no affect on AFFO.

On our environmental remediation efforts the headline for this quarter is that our overall environmental liability accrual remains basically constant in the prior quarter at approximately $43.5 million. Our cost estimates increased by approximately $3.7 million as a result of contamination discovered in the course of tank removals. During the quarter we also spent approximately $3.1 million resulting effectively in an offset of the new amount accrued.

From a growth perspective externally, we are evaluating and pursuing a number of acquisition opportunities, the challenge for us is to remain disciplined and to only execute on the best of these opportunities within our cost of capital constraints. The current low interest rate climate negatively affects cap rates, I have heard it describes as a yield’s [diamond] and we believe it is essential that we maintain pricing discipline in this environment, where we are making long term investments.

With interest rates most likely to move up in coming years, a point to a more opportunistic investment stands than we have had in previous years. We are also increasing our focus on ways to drive growth through our own existing portfolio. During the past few years, most of this activity has focused on dispositions to drive down costs and move out slower growing assets.

Today we believe we have many opportunities to extract additional value from our existing portfolio. One focus will be exploring redevelopment opportunities for certain locations for higher and better uses to increase our returns on these properties. We will also evaluate financing upgrade to existing properties and/or simply harvesting high value locations like our 10th Avenue sale in Manhattan to generate higher returns.

By their nature, these are long-term opportunities but we believe as part of creating value, we need to explore all options. I also want to observe that we believe we’re exceptionally well positioned from a financial perspective. We handle balance sheet that affords us meaningful capacity and flexibility to support growth this year.

At year-end, our net debt was less than $135 million which is the lowest level in more than 3 years even after funding the $70 million acquisition we completed in 2013. The ongoing transformation of Getty into a company that produces annual revenue growth is progressing well. We know there will be challenges we will continue to face, but we believe the combination of select acquisitions, the recycling of slower growth assets and continuing to focus on measurably lowering operating costs will result in improving our performance.

In summary, we’re energized by both the organic and external growth opportunities we continue to pursue. We are in the later stages of our transformation activities, pleased with the successes -- sorry I am getting a little tongue tied, and recognize that there are challenges ahead to finish the process. We are well capitalized, have a low leveraged balance sheet and we’ll continue to work to enhance value for our shareholders in 2014 and beyond.

Finally before I open up for questions, I want to formally welcome our new Chief Financial Officer, Chris Constant to his extended role. Chris has already been responsible for many of the things you see on this call including our planning and borrowing relationships. And I am pleased to have him onboard with his additional new responsibilities for financial reporting.

With that operator, I am very happy to open it up for questions. And I guess you have to come on and give everyone instructions on how to do that.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions). And we will go ahead and take our first question from Tony Paolone with JP Morgan.

Tony Paolone - JP Morgan

Thanks, good morning.

Dave Driscoll

Good morning.

Tony Paolone - JP Morgan

Dave, if you were to think about your portfolio ex the marketing assets, the more arm’s length assets that you have purchased over the years, where are cap rates for those types of properties today?

Dave Driscoll

The opportunity that we are seeing right now Tony are in the sub 8% range for the high quality properties, for the highest quality brand new properties in fancy markets like Florida and California, you can even see sub 7 cap rate. And I think those are the ones in particular that we are not particularly interested right now in chasing. That’s a 1031 market phenomenon as much as anything else and not something that from an institutional perspective excites us very much.

Tony Paolone - JP Morgan

Okay. Any $20 a share for stock price, you guys made a portfolio better than anybody. What do you think the implied cap rate is on those sort of non-marketing assets right now at 20 bucks a share?

Dave Driscoll

Well, you know, it’s hard for me to speculate on that kind of question because I haven’t set down actually down numbers on that but I think it’s certainly above 7, it’s between 7 and 9, let me put it that way.

Tony Paolone - JP Morgan

Okay. Just on G&A, what’s G&A going to be in 2014, just trying to understand because it’s bounced around a little bit, like what the run rate is?

Dave Driscoll

Tony, it’s hard to say with any precision what that number is going to be, I think extrapolating from the fourth quarter is not a terrible place to start.

Tony Paolone - JP Morgan

Okay. So, it’s closer to that $3 million to $4 million as opposed to $5 plus million range where it kind of seem to be running before?

Dave Driscoll

Yes, I would say it’s probably closer to the $4 million range, [depended] it is the $3 million range but it’s certainly closer to that and it is the $5 million range.

Tony Paolone - JP Morgan

Okay. In disc ops, it seemed to be a negative number; is that -- was there anything just as you unwind and sell those, that’s going to impact earnings, like is that really like it is going to be a negative FFO drag until those are gone?

Dave Driscoll

Yes, I think you said it, it’s just going to be a negative FFO drag until they’re gone, redeveloped or repositioned in some way. It isn’t just disposal at this point. Some of those assets we think can be turned around, some of them to be fair just need to be gone.

Tony Paolone - JP Morgan

Okay. And what was cash out the door in the fourth quarter for environmental?

Dave Driscoll

It’s a little over $3 million I think.

Tony Paolone - JP Morgan

And any sense as to what that number looks like if we were to just ignore kind of the accounting treatment of environmental related cost, or just think about cash over the next few quarters, is that…

Dave Driscoll

It’s sort of like in a good trend where it is right now subject to the observation that cash spend on environmental is very much a seasonal number. So I think you could see some variation in the warmer seasons, in the warmer quarters. And this is -- we’re reporting, really reporting the fourth quarter which self start as warm. So, maybe you could call this an average quarter, you could see it come -- I guess the point I’m trying to make is in the first quarter you could see it come down, particularly this first quarter, because guys are not out digging holes in the ground in this particular winter. But, I think that this is a not a bad number to extrapolate from.

Tony Paolone - JP Morgan

Okay. And any CapEx that was spent in the quarter?

Dave Driscoll

Nothing meaningful from our standpoint.

Tony Paolone - JP Morgan

Okay.

Dave Driscoll

I want to be clear on that Tony that it does not mean that we didn’t spend -- that no money was spent on our portfolio. I think that our tenants, I can point to any number of examples, so our tenants spent a lot of money on the property, but we didn’t spend a whole lot.

Tony Paolone - JP Morgan

Okay. And then just last question, on NECG, so are they paying anything enough, or they just stopped payments?

Dave Driscoll

Right now, they have been paying a modified amount on their rent, so for the last say since July. And that continued and that’s the cash number that we’ve been reporting since July, since been in our AFFO number since July. And given where that portfolio fits right now, we’re pretty comfortable that there isn’t pretty much downside for NECG in that number. There could be some bumpy transitional things, but on a season’s basis, stabilized basis like, we’re comfortable with that number. Those are all decisions we made back in June when we took the cash reserves.

Tony Paolone - JP Morgan

Okay, great. Thanks.

Operator

(Operator Instructions). And we’ll go next to Juan Sanabria with Bank of America.

Juan Sanabria - Bank of America

Hi. Good morning guys. Just a quick question from a guidance perspective, I know you’ve put on something last year, what was thought process as to why you chose not to go that [round] this year given presumably you have a lot more clarity on the moving pieces?

Dave Driscoll

Well, I think Juan you answered your own question. Last year if you recall there was so much confusion coming out of 2012 and frankly what 2013, we’re pretty sure the first two quarters were going to look like that we felt that some guidance was important to provide and this company historically had never provided guidance. And when we put the guidance out last year on this call, we said this is a one-time thing, we are not going to do it again, we’re not establishing a policy of doing guidance and that is our intention going forward.

It is something that we constantly review and consider. But I think, like I said, I think you answered the question. Last year there was so much confusion we felt, thought that it was really important. This year we think that just certainly some issues and certainly unresolved things that aren’t nailed down, but it’s a lot closer. And we don’t think the urgency is there as much as it was.

Juan Sanabria - Bank of America

Okay. From a balance sheet perspective, how much do you think you can get fund before you sort of get to the top-end where you feel comfortable of leverage sitting and can you just remind us of what that sort of feeling or where that comfort range lies?

Dave Driscoll

Well, we currently have roughly $150 million available to us under our existing line, no questions asked; we’re on it right away. I think it’s fair to say that we could feel comfortable to go north of that and still feel comfortable because even with all of that drawn down we’re still very low leveraged in our opinion, we’re still less than 40% debt to market cap. But I think that as we started to get to sort of 50% on a theoretical basis then you’d see a start to maybe get a little uncomfortable. It also sort of kind of depends on what we’re funding with it and the nature of that. So you’ve got a -- there is a dynamism in that that it’s hard to be very much more precise in the answer.

Juan Sanabria - Bank of America

Okay. So you’re sort of thinking I guess 45% debt to market cap would be a ceiling effect?

Dave Driscoll

I would say I am starting to get nervous at 40% and I wouldn’t go over 50%.

Juan Sanabria - Bank of America

Okay.

Dave Driscoll

Because I don’t want to put an absolute out there, I am even more nervous at 50%.

Juan Sanabria - Bank of America

Okay. And then could you talk a little bit about maybe opportunities to refinance some of the debt, I know you kind of [redid] it around this time last year. But giving your more solid footing is that something you’re working on and kind of how much margin compression could we see as a result?

Dave Driscoll

I think there might be a little bit of spread compression in our pricing grid on the floating rate side of our debt right now. I think though that given the fact that we are pretty low leveraged, we are not sure that where we sit on the grid today that there is a whole lot of opportunity if we were to move out and take more of our availability. And hence as the pricing grid moves up, we think that maybe there is some pricing benefit to it. But I don’t think there is an immediate benefit sitting here to be taken based on where we are on our leverage grid right now.

And of course the fixed rate piece, which we did now a year ago, 56%, is -- first of all it’s really not re-financeable given the way it is. But if we were to go out and do fixed rate money today because we do it at that price may be, may be not the tenure has moved up to 425 to 450 basis points depending on the day since we did this. But I am comfortable that that’s a competitively priced piece of paper within the margin.

Juan Sanabria - Bank of America

Okay. And then just on the dispositions you guys have still left to do, it seems like there is a broader pool that you are looking at relative to should I guess maybe more of a pruning of the portfolio versus disposing of I guess more vacant properties. But I guess going forward how should we think of the dispositions that are there? Are actually losing NOI, is there sort of a ballpark cap rate we can think about or is it really just getting rid of properties where you’re losing money as to Tony’s previous question?

Dave Driscoll

Yes. I think it’s at this point properties that are being disposed off I think it’s pretty easy to say with the blank of statement with disposition of that property even before the reinvestment of the proceeds that we realized is a cash flow positive event.

Juan Sanabria - Bank of America

Okay. And just one quick follow-up, if I look at your AFFO sort of calculation in your 8-K, the charge on impairments of dividend what’s flowing through the P&L. What’s the difference and where is that difference accounted for on the income statement?

Dave Driscoll

I am looking at Chris on this one.

Chris Constant

I think what you’re referring to is the total impairment taken…

Juan Sanabria - Bank of America

5.7?

Chris Constant

Correct, versus what’s in the continuing operations and the difference would be impairment charges taken related to properties that account for as discontinued.

Juan Sanabria - Bank of America

Okay. Thanks guys.

Joshua Dicker

Thanks Juan.

Operator

And we will take our follow-up question from Tony Paolone with JP Morgan.

Tony Paolone - JP Morgan

Thanks. Just on one balance sheet question, I just got a follow-up on the equity side. Do you guys have the ability to put an ATM program in place?

Dave Driscoll

Yes.

Tony Paolone - JP Morgan

That’s been something you’ve considered?

Dave Driscoll

We consider everything all the time, but we have not put one in place. Obviously if we did, it would be publically announced. To be eligible for an ATM, Tony all you have to do to have a shelf in place and we do.

Tony Paolone - JP Morgan

Okay. And then just last question, can you give us any sense as to where taxable income is kind of trending, just didn’t understanding as to what your dividend requirements are?

Dave Driscoll

Well, they don’t perfectly track; I can say that for 2014 from what we see today, taxable income is going to be above AFFO or NOI mostly driven by the dispositions that are going to occur. But whether that affects our distribution requirement is a different question, because in the abstract it’s really easy to think of the chosen as writing together, but they really don't, there is enough a lot of legal room. And you can, I mean for example is that you can use distributions in subsequent years to cover under distributions in a prior year if that makes any sense. That creates sort of a push going forward, but it's not rigid that in a particular year, that you have to make all of the distributions required for the taxable income. Does that make any sense?

Tony Paolone - JP Morgan

Yes, no I understand some of the rules around carrying over and so forth and the timing of those things. But if, I'm just trying to sense you're mentioning that your AFFO in the fourth quarter is $0.24 and so was just to annualize $0.02, about a buck and you're saying taxable might be north of that. It sounds like if that trend would recur overtime, the $0.80 run rate in your dividend just it sounds like it’s actually not enough, putting the timing and nuances to the payments aside?

Dave Driscoll

No, you're right, I mean yes. But you also wouldn't necessarily want to move your overall dividend policy against something that was being that resulted from more like one time capital gains from disposition to properties. So, we don't want to move our basic dividend in a way to cover something that's really a temporary event.

Tony Paolone - JP Morgan

But your, but the gain is more than the AFFO number right in the fourth quarter?

Dave Driscoll

That's correct. The gains are not in the AFFO number.

Tony Paolone - JP Morgan

Okay, great. Thank you.

Operator

And that concludes the questions-and-answer session today. Mr. Driscoll I'll turn it back over to you for any additional or closing remarks.

Dave Driscoll

My closing remarks are thank you all for listening to the call and your continued interest in our company. And we certainly look forward to talking to you when hopefully the back of this winter has broken and it’s a lot warmer outside. Thank you.

Operator

And that does conclude today’s conference. We thank you for your participation.

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