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Getty Realty Corp (NYSE:GTY)

Q2 2012 Earnings Conference Call

August 2, 2012, 09:00 am ET

Executives

Joshua Dicker - VP, General Counsel and Corporate Secretary

David Driscoll - CEO

Analysts

Anthony Paolone - JPMorgan

Matt Feldman - Davidson Kempner

Bruce Berger - Turnaround Capital

Jeff Lau - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Getty Realty second quarter earnings conference call. Just a reminder, today's call is being recorded. Now, for opening remarks and introductions, I will turn the call over to Joshua Dicker. Please go ahead, sir.

Joshua Dicker

Thank you very much, Operator. I would like to thank you all for joining us for Getty Realty's second quarter conference call. After the close of trading yesterday, the company released its financial results for the quarter ended June 30, 2012 and filed its Form 10-Q with the Securities and Exchange Commission. These document are 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 historically 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.

I refer you to the company's annual report on Form 10-K for the (technical difficulty) 2011 and the company's quarterly report on Form 10-Q filed yesterday as well as our other filings with the SEC for a more detailed discussion of the risks and factors that could cause actual results to (technical difficulty) 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 may be made in the course of this call.

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

David Driscoll

Thank you, Josh. And prior to starting a few brief remarks, I want to introduce the other officers with the company who are on the call with me and Josh Dicker today. Mr. Leo Liebowitz, our Co-founder and Chairman; out Chief Financial Officer, Tom Stirnweis; and Kevin Shea, our Executive Vice President.

Again, I want to wish you all a very good morning. Thank you for coming to the call and listening to us today. Yesterday evening, we announced that for the quarter ended June 30, 2012, we earned $3.6 million or $0.11 per share on revenues of $27.5 million.

This resulted in FFO of $7.2 million and AFFO of $6.3 million, $0.21 and $0.19 per share respectively.

All the details are available in our 8-K and our 10-Q, which were both filed with the SEC yesterday evening and are available on our website, the SEC EDGAR website and various other financial media and websites.

The quarter continues to be a transitional one for us in several important ways. As we continue to move away from the impact on our results related to the bankruptcy filing of what was our largest tenant, Getty Petroleum Marketing, who I will refer to as Marketing in this call.

From a longer-term perspective, however, I'm pleased to announce that this is most likely the last quarter we anticipate that our results will include results directly derived from marketing, although as previously discussed, we expect our net income FFO and AFFO will be lower going forward until we can grow our way back to the levels we achieved previous.

This morning, I want to highlight three items where the termination of the marketing lease in mid quarter had a negative impact on our results.

The first is that we recognized $6.2 million of revenues during the month of April from the Marketing lease. Plus, in accordances with GAAP, immediately took a full reserve against those revenues thus our revenues after reserves of 18.8 million in this quarter versus $26.9 million in the same quarter last year, is a better measure of our performance than a simple revenues-to-revenues comparison.

Second, we incurred material expenses for real estate taxes in other items for the Marketing portfolio during April. Essentially, this means that we had three months of costs but only two months of revenues from the Marketing portfolio for the quarter.

I would encourage caution using this quarter's performance metrics to extrapolate our future performance.

Third, we continue to incur substantial legal and other costs associated with Marketing's bankruptcy proceedings. These costs add an additional drag to the quarter.

As the results of these and other less significant items, I believe it will not be until we get our third and fourth quarter results that we will finally be in a position to report more visible run rate type quarters.

Turning to the progress we made in the quarter, as we previously announced on April 30th, we have triple-net lease approximately 270 locations in six separate long-term triple-net leases with regional field distributors.

In addition, we entered into interim fuel supply agreements with global partners and other regional gasoline distributors, covering an additional 330 properties.

There are also nine terminals in 141 properties whose tanks have been removed but we are seeking to dispose. We continue to make steady progress in these efforts and continue to do so in the quarter with 13 locations sold, generating approximately $4.4 million in aggregate sales price.

We are also putting significant time and effort into maximizing the long-term value of the 330 properties remaining over the interim fuel supply agreement. Many of these properties have redevelopments and reinvestment potential both within and outside the industry.

And while some of the locations will be disposed, we currently (intend) to reelect the majority of them on triple-net leases. We expect to be executing on this opportunity in the coming quarters and, in the meantime, these locations are in the aggregate generating cash flows from operations, thus making an overall positive contribution to our results.

Environmental remediation spending is another meaningful use of cash for us, particularly in light of our repossession of the Marketing properties. Unfortunately, the accounting for environmental remediation obligations is very complex and the timing of when we pay for our environmental obligations differs materially from when these liabilities are accrued for or reflected in our operating results in accordance with GAAP.

Generally for this quarter, I can say that the actual cash outlays for environmental remediation for properties that we historically retained were less than last year's costs. Conversely, our cash outlays for the environmental remediation that were Marketing's responsibility under the master lease, were lower this quarter than we anticipate they will be in coming quarters.

In addition on the environmental front, I am pleased to report that we have purchased a 10-year environmental insurance policy from a leading carrier, which may protect us or may provide protection to us from unknown environmental liabilities on all our properties.

The policy has a $50 million aggregate limit and is subject to various self-insured retention. Therefore, we anticipate it will primarily help protect us only from significant events.

Another item, primarily operating expenses and interest costs, remained in line for the quarter and in light of the structural issues on the revenue side, which I think are much more important, I do not have a particular comment on any of them at this time.

We continue to work diligently and make progress every day. Perhaps the single largest reflection of these efforts was our June 15 announcement of our reinitiation of quarterly dividends.

As we further rationalize the marketing portfolio, maximize the value of the current portfolio and return to pursuit of growth by accretive acquisitions in the coming years, we will emerge a much stronger and a more profitable company.

With that background, I think it's time to open the call for questions. So Operator, if you can open up the queue, I'm happy to answer any questions that we may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Anthony Paolone - JPMorgan.

Anthony Paolone - JPMorgan

I was wondering if you could help me just a little bit with some of the basic revenue run rate numbers. I know that the quarter was a transition one. But if I look at like your quarter last year and look at the non-Marketing properties, is that a fairly safe run rate for the non-Marketing assets? I think it was about $11.3 million of net revenue for those properties.

David Driscoll

I think, Tony, if you're -- I mean, I think the general answer to that question is yes but I don't necessarily want to endorse the $11.3 million only because we don't -- I don't have it at my fingertips right now and Tom's looking for it.

But generally speaking I can say that the run rate of the non-Marketing properties is roughly the same this year as it was last. Last year's quarter had the full effect of the NAREIT acquisition in it. So it should be roughly the same.

Anthony Paolone - JPMorgan

And then of the Marketing assets, you'd already disclosed 282 properties that have an annual net rent of about $17 million, so we can pull that out. So if I do those two things, if I start with 1130 properties, I get down to something like 493 properties are either have tanks removed or are either in part of this eviction process or the 330 that are month-to-month

And so I was wondering if you could kind of go through some of those buckets and just give us a sense as to what net rent they're producing right now.

David Driscoll

I know that you want the numbers but I would like to respectfully decline providing that kind of detail. We haven't put it into the Q and I'm reluctant to put that kind of detail up right now. We'll talk amongst ourselves and see if we want to publish something supplementary but I'm uncomfortable with that level of detail right now.

Anthony Paolone - JPMorgan

If I add up just the -- you mentioned the 775 properties affected by Marketing. If I just go through some of your bullet points in the press release about what's under the licensing and (master lease) and so forth, there's still a bunch left that are unaccounted for.

Are those just empty to-be-sold? Is that what we're -- is it like 50-something properties I think.

David Driscoll

I think I went through it in the remarks fairly well. There's 330 that are in the interim fuel supply agreement. There's roughly 140 left, which are the tanks removed and you can see that we're selling those at a pretty good clip right now and then nine terminals and I think that covers all but five or six maybe of the entire marketing portfolio.

Now inside the 330 there are, to be sure, some that are contributing more than others and some that are contributing very little at all because they're empty. But we're actually -- we have empty locations and each week we have a meeting and my guys tell me how many we filled up that week.

So we're actually putting new dealers into locations. Think of it in a shopping center context, leasing in-line space on a very regular basis at this point.

Anthony Paolone - JPMorgan

The ones that are where the storage tanks have been removed at the 70 properties but are under a month-to-month licensing agreement, what's the nature of those licensing agreements if there's no fuel tanks there. Like how does that work?

David Driscoll

It's the pizza shop. It's the car parking lot. It's the car repair shop. There are, frankly, a staggering number of uses that these properties are being put to. I just (came) the other day that we have a vet hospital in one of them.

Anthony Paolone - JPMorgan

So then is this idea of having a licensing entity in the middle of you all and these tenants, is it just to manage that situation?

David Driscoll

Yes, I think the licensing, Tony, can get to be taken out of context. I would ask you to consider the licensing as a month-to-month lease that gives the tenant the right to be in the property because he wants to have something that says he's allowed to be there but gives us the flexibility to be able to sell the property where otherwise we'd let it on a month-to-month basis.

The lawyers like to call it a license because in certain states if you call it a lease you maybe make it more difficult to get somebody out on 30 days' notice than a license and it's -- that's all there is to it. It's a nomenclature thing more than any other thing.

Anthony Paolone - JPMorgan

Then this environmental policy that you all took out, I just want to make sure I understand. Is that purely for pre-existing situations, so to the extent you relet those properties or they've been relet, the new tenant is responsible from that point forward? Like what exactly does it cover?

David Driscoll

It protects against unknown environmental liabilities on any of the properties that we currently have. It specifically excludes known environmental liabilities but it protects us against unknown liabilities.

Anthony Paolone - JPMorgan

And the $3 million there, that's just a one-time cost. You're done for the next 10 years as it relates to this policy.

David Driscoll

That's correct. One-time upfront and it will be spread over the life of the policy from an income statement standpoint. And I take it a step further also to say it's a high deductible policy so that it's mainly there to protect against a significant event or aggregation of events for it.

Anthony Paolone - JPMorgan

Then you mentioned that properties have either redevelopment or repositioning opportunities. Can you just comment on your appetite to actually put money into these assets or is this something you're going to look to the tenant to do?

David Driscoll

I think it's a combination of both but make no mistake about it, if we can see our way clear to getting good rates of return on some of these properties -- and we do -- then we're eager to participate to take advantage of that.

I think why leave it to the tenant to get this community 20% returns if we can get a piece of that ourselves?

Operator

Your next question comes from the line of Matt Feldman - Davidson Kempner.

Matt Feldman - Davidson Kempner

Two questions, first, Anthony sort of alluded to the environmental policy question. So it covers unknown environmental issues but is there a certain timeframe by which it starts, meaning is it unknown environmental conditions even during Marketing's tenureship or is unknown environmental conditions starting from today?

(Technical difficulty) in properties that were sold for 5.7, the call it $315,000 per station average for values on a go-forward basis for that pool. And what are the net proceeds that the company's collecting after commissions and other expenses associated with the sale?

David Driscoll

First, with respect to the insurance policy, what it covers is environmental contamination that is unknown at the time that the policy was entered into. So you could think of it as known as of today and unknown going -- but discovered tomorrow.

If it was known as of today, then it wouldn’t be -- it would be excluded. If it was discovered tomorrow, then it would be subject to the policy.

Now, with respect to the sales, the recorded numbers that aren't what I recall, so I want to go back and check them and I could have misspoken. But I thought that what I said was we sold 13 properties for approximately $4.4 million of aggregate sale price.

I did not do the math on the average of those. But I would tell you that until we get a few quarters of supporting this, I don't want to go to any average in terms of sell price or endorse anything.

I think it's not terribly far off but it's not a big enough sample yet to derive any conclusions.

And then I apologize, but I was trying to get the answers to the first two questions and I didn't fully hear the third question. Could you repeat that?

Matt Feldman - Davidson Kempner

It was (inaudible) the growth sales proceeds. What is the company collecting net? Meaning, are you paying out …

David Driscoll

93% of that, maybe a little more after legal and brokerage fees. We are providing mortgage financing but at this quarter it was less than 30% of the bill price.

Operator

Your next question comes from the line of Bruce Berger - Turnaround Capital.

Bruce Berger - Turnaround Capital

Yes, of the 330 stations that you referred to in the press release, how many are actually operating right now as functioning gasoline stations that are generating revenue?

David Driscoll

I would say somewhere on the order of functioning gas stations of the 330 I would say probably 320.

Bruce Berger - Turnaround Capital

And of those month-to-month agreements, are you typically going to get -- these stations probably (inaudible) between $60,000 to $90,000 per year. Are you -- I'm not asking for what it is, but do you expect you'll typically get that plus full reimbursement of the property taxes?

David Driscoll

It's all over the map, Bruce. It's hard - some of these guys paid the (technical difficulty) reimbursement for the property taxes, some don't. When you look at it on a net basis, it's - like I said, it's really all over the map.

Bruce Berger - Turnaround Capital

It was recently in the Getty Petroleum Marketing bankruptcy proceedings an estimate that was put out for what the environmental liabilities are for these stations that I guess that you took ownership of and I guess that number was $75 million.

And just from my calculations, if you take back the money that -- or if you make an assumption that you'll get some money from the states for the reimbursements for tank removal, it sort of jives with what you estimated your tank liability will be. But I just was wondering if you wanted to make a comment on that filing.

David Driscoll

I don't. I'd be happy to try to clarify it by going into the filing but the $75 million does not jive with our number, which is really closer to $50 million comprised of the environmental liability and the tank removal liability. And that's before the reimbursement amount.

But I think the $75 million -- I'd have to go back and look at the context and see what that meant.

Operator

(Operator Instructions) Your next question comes from the line of Jeff Lau - Sidoti & Company.

Jeff Lau - Sidoti & Company

Just another question on the different types of properties; are there any that are I guess maybe coming against eviction? I know you mentioned there was 40 that were evicted who didn't come to any agreements. But do you see any kind of on the -- any additional ones that are kind of on the horizon?

David Driscoll

Well, I think, Jeff, you might have -- I think you got -- the wording of that is a little bit wrong. I mean, there are -- we have evictions proceedings going on at the present time against approximately 40 locations that are in the various portfolios.

We have a handle on those and, frankly, we get small victories and small defeats every week. We've had a larger victory recently and I think we're going to have complete control of 15 to 20 very valuable stations here shortly.

But there is in Connecticut a group of 30 plus or minus guys that have banded together that we are continuing to work with and I really don't want to comment on that because it's -- I would describe it as a very active litigation at this time.

Jeff Lau - Sidoti & Company

Is that specific group -- I mean, are they -- are you getting any income from them or is it just they're just kind of sitting there?

David Discroll

We're getting some income from them but we have a lease with a sub tenant on it and we're working diligently to resolve that issue with the sub tenant and with the group and with the courts if we need to.

Operator

Your next question comes from the line of Anthony Paolone - JPMorgan.

Anthony Paolone - JPMorgan

Can you just lay out what the cash environmental was in the quarter versus the GAAP stuff that came through to the income statement? For instance, you had the $564,000 benefit on your income statement but then I assume there was also some of that that was coming through depreciation.

So is there a way to just reconcile what the actual cash was with the income statement impact in the quarter?

David Driscoll

Yes, Tony, bottom of Page 5 in the funds flow statement we have a line which is environmentals and mediation costs because, frankly, in recognition of the fact that the GAAP accounting has gotten so confusing on this, we're going to try to start to put out what the quarterly cash outlay for environmental loss and it's showing $1.1 million for the quarter. I'm sorry, I’m told that's year-to-date, excuse me.

Anthony Paolone - JPMorgan

So $1.1 million was the cash outlay for environmental year-to-date?

David Driscoll

Yes.

Anthony Paolone - JPMorgan

And that's for everything or just the …

David Driscoll

Everything and I think that's why you found in my remarks cautionary tales around extrapolating that number. For a whole variety of reasons we think that number will increase in the coming quarters.

Anthony Paolone - JPMorgan

So if we're looking at -- just trying to understand this better -- if we're looking at just GAAP income statement, I guess going forward, one of the first things we should do is the environmental expanse, like the $564,000 benefit you had in the quarter, should we strip that out going forward and then also ignore the G&A and then just look for you all to disclose some other supplementary figure?

David Driscoll

If you're looking to get to sort of like a cash generated number, yes. And we're going to try to put that disclosure in in a way that you can do that relatively easy while still complying with GAAP.

Anthony Paolone - JPMorgan

And in your commentary you kind of broke it out into two components, which I though was helpful. One was you'd mentioned compared to a year ago that environmental expanse that, let's call it normal, that you had for a long time was a little bit less than it was a year ago.

But then the stuff, if you will, was maybe lower than it's going to be going forward. Did - am I …

David Driscoll

You are thinking about that right. And I think that's around the fact that historical stuff has had a relatively tame six or eight quarters and the new stuff, since we've just taken it over, with new environmental consultants and new environmental people, we're basically putting our plans together now to (inaudible) the environmental remediation but you don't start incurring costs really until you start digging in the ground and doing things.

And so I think you're going to see more of that here in the coming quarters. I know some tank removals we're going to do and some other things that will impact that.

Anthony Paolone - JPMorgan

So then at least that number, though, that you used to have historically that I think ran somewhere in the, call it, $1 million, $1.5 million or something a quarter range, we should still assume that kind of level going forward for that piece of it and we're basically at this point we'll have to be guessing what that incremental number is going to run. Is that right?

David Driscoll

I think that's correct. Although, again, if you look at the trend of the last, say, eight quarters or so, the historical number has been trending down and I'm -- it's hard to deny now that trend's continuing because it's been going on for so long.

Operator

Your next question comes from the line of Bruce Berger - Turnaround Capital.

Bruce Berger - Turnaround Capital

Yes, I had a question regards GPMI used to pay (Tie Reenvironmental) for I guess ongoing remediation and consulting and I guess you'll be -- you'll have somebody that you'll pay for that, for the stations that you took back.

Will that monthly expense that they were paying -- how will that show up on your income statement? Will that be just a -- will you classify that by environmental or SG&A?

David Driscoll

It's a couple things. First, GPMI used to pay (Tie Re) not only for environmental remediation but also for maintenance. We have hired contractors, including (Tie Re). We pay them for maintenance and that you'll see as an ordinary expense o our income statement.

And at the same time, to the extent that they're doing environmental remediation for us, that actually will flow through the G&A line and you're better to pick it up as we were just discussing with Tony on the cash outlay per quarter number that we're going to give you.

Bruce Berger - Turnaround Capital

Do you anticipate that what they were paying (Tie Re) as sort of what you'll also be paying them per month or it will be a lot less.

David Driscoll

I - first of all -- and I'm not familiar with what you're seeing in their income statement. So I don't know whether that is combining the maintenance line and the environmental line.

But if it's purely environmental, I expect that we will be paying roughly the same but in the upper range of what their numbers were because I think we're going to be going after environmental a little bit more diligently than they were.

Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'll turn it back to management for closing remarks.

David Driscoll

We appreciate you're continuing to stay with us on a muggy Thursday morning in New York and we'll look forward to talking to you again in the fall after we've made even more progress. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great …

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