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Getty Realty Corp. (NYSE:GTY), the largest publicly traded Real Estate Investment Trust (REIT) in the U.S., has a problem with one of its tenants, Getty Petroleum Marketing, which is having difficulties paying the rent, almost $5 million per month.

Getty Realty is in the business of leasing properties related to motor fuel and convenience stores.

Getty Petroleum Marketing manages and operates approximately 800 convenience stores and service stations located in the Northeastern U.S.

Getty Realty and Getty Petroleum Marketing were once a part of the same company, but the company was split into Getty Realty and Getty Petroleum Marketing in 1997. A long-term lease for gas station property expiring in 2015 is in place between the companies.

In 2000 Lukoil, Russia’s largest oil company, acquired Getty Petroleum Marketing, but in March 2011, Lukoil sold Getty Petroleum to Cambridge Petroleum Holding.

Getty Petroleum did not make its full November rent payment to Getty Realty, followed by Getty Realty seeking to evict Getty Marketing from its properties. Getty Petroleum Marketing claims Getty Realty has not performed environmental remediation efforts on some of the properties as specified in the master lease agreement and was withholding rent in order to cover the cost of performing the remediation. Getty Petroleum Marketing brought a legal action against Getty Realty to enjoin Getty Realty from terminating the master lease. An injunction was granted by the New York State Supreme Court associated with Getty Petroleum Marketing's request. The court also ordered Getty Petroleum Marketing to pay Getty Realty an amount equal to the October 2011 in two parts, $4 million to be paid to Getty Realty immediately and the approximately $900,000 balance to be paid to the court to be held in escrow until final determination. Getty Petroleum complied with the court's order. On December 5, 2011, Getty Petroleum Marketing filed for Chapter 11 bankruptcy.

The properties leased to Getty Petroleum Marketing represent about 70% of Getty Realty’s portfolio of properties, so if Getty Petroleum doesn’t continue to pay the rent, Getty Realty will be in some serious trouble, as evidenced by the dramatic drop in the company’s stock price as shown below:

If Getty Realty does not receive rent payments from Getty Petroleum Marketing, the company could face some cash flow problems, as Getty Petroleum Marketing's rent represents about 65% of the Getty Realty's revenue. Without Getty Petroleum's rent, Getty Realty wouldn't have shown a profit last year, all else equal. Additionally, Getty Realty is about to pay a dividend of $0.25 per share which will reduce the company's cash on the order of $8M.

On November 22, 2011, Getty Realty announced payment of a quarterly dividend of $0.25 per common share payable on December 29, 2011, to shareholders of record on December 15, 2011. So the ex-dividend date is two days earlier or on December 13, 2011. With Getty Realty’s depressed stock price at around $13, the $0.25 dividend represents a very nice annual dividend return of 7.7%.

A dividend investor might be salivating at this point and considering a purchase of Getty Realty’s stock in order to receive the upcoming dividend. But, with Getty Realty’s stock price plummeting and the murkiness surrounding its largest tenant, this might not be a wise choice.

An in-the-money bearish collar position for Getty Realty might be considered in order to take advantage of receiving the dividend and to protect against a drop in the price of the stock. An in-the-money bearish collar may be entered by selling an in-the-money call option against an existing or purchased stock and buying an in-the-money put option.

Using PowerOptions tools, an in-the-money bearish collar position was found for Getty Realty with a profit/loss for one contract of the collar as shown below:

(Click charts to expand)

The in-the-money bearish collar has an inverse profit/loss compared with a traditional out-of-the-money bullish collar. The in-the-money bearish collar generates the maximum return if the price of the stock drops and results in a loss if the price of the stock increases significantly. The specific call option to sell is the 2011 Dec 12.50 at $0.75 and the put option to purchase is the 2011 15.00 at $2.45. The prices for the options were selected at midway between the bid/ask price, so this trade should be entered with a net debit of $14.70 ($13.00 - $0.75 + $2.45). The option expiration date of December 17, 2011, is after the ex-dividend date of December 13, 2011, so the position will provide protection through the ex-dividend date.

The maximum potential loss for the position, not including the dividend, is 15% and the maximum potential loss including the $0.25 dividend is 13.5%. A profit/loss graph for one contract of the position including the $0.25 dividend is shown below:

The potential return for the position is 0.5% if the price of the stock is unchanged at expiration and if the price of Getty Realty stock continues to drop the potential return is 3.8%, even if the stock price drops all the way to zero.

An investor considering the in-the-money bearish collar position might wait to enter at a date closer to the ex-dividend date of December 13, 2011. Additionally, there is a good chance the stock will drop in price on the ex-dividend date, which increases the potential for realizing a profit. Of note, the 2011 Dec 12.50 call option does not have a lot of open interest, currently at 30. Also, with the murkiness surrounding Getty Realty and its major tenant, the chance of the company's stock price recovering in the short term is unlikely.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: A Short-Term Dividend Investment For Getty Realty